R & M Stansfield Enterprises Ltd v Axa Insurance UK Plc

This is an appeal from His Honour Judge Kershaw QC. In August 2004 he heard an assessment of damages following termination of a salvage contract under which the respondents (RMS) collected cars for the appellant insurers (AXA). A draft of a written judgment was only produced in February 2005. A letter dated 1^st March 2005 was written to the court by those acting for AXA pointing out that there was a principal issue relating to how a large number of vehicles, which remained with RMS after termination of the contract, should be dealt with in the assessment of damages, and how indeed the judge was under the false impression that it was common ground that no deduction should be made for the same. Despite that letter the judgment which was to be handed down on 27^th April 2005 had no material alteration from the original draft. On 27^th April 2005, after debate as to whether the judge should now deal with the point, which necessitated an adjournment for Mr Matovu for AXA to take instructions, the final judgment was only handed down on 8^th September 2005. The above shows a totally unacceptable state of affairs and, unfortunately as will appear, they were not the only unsatisfactory features of this appeal.

RMS were parties to a salvage contract, originally with UAP Provincial Insurance Company plc but ultimately with AXA. Under that contract RMS were obliged to collect and store free of charge any motor vehicle salvaged as requested by AXA. Under the contract RMS ultimately obtained title to the vehicles collected and would, on receipt of a request by AXA, make payment to AXA in accordance with an agreed scale. If RMS had to pay recovery or storage charges to third parties AXA was obliged to reimburse the same. If RMS had to store the vehicles for an excessive period before it had obtained title, the agreement provided for the senior engineer discussing with RMS an amendment to the agreed salvage value in individual cases. The agreement by its terms was terminable upon three months’ written notice and the agreement provided for the terms continuing upon termination “until such time as the final transaction has been completed.”

By letter dated 22^nd March 2000 AXA purported to terminate the agreement “from the close of business on Friday 28^th April”, i.e. giving only just over five weeks’ notice. By letter dated 27^th April 2000 RMS, through its solicitors, asserted that the termination was wrongful and refused to accept the notice.

In June/July 2000 there were discussions between RMS and AXA which resulted in AXA writing a letter dated 3^rd July 2000 in which they said:-

It was AXA’s case that this letter evidenced a concluded compromise in relation to all outstanding disputes flowing from their purported termination. So far as RMS were concerned it was their case that no concluded compromise was reached and this waiver simply took into account the possibility of storage charges being deducted from the value of the vehicles.

In the result RMS commenced proceedings on 14^th December 2000. Their particulars of claim alleged a wrongful termination of the agreement and that the wrongful termination was a repudiation. The particulars of claim also asserted as the primary case that no repudiation had been accepted. Indeed, it asserted that by letter dated 10^th August 2000 RMS had informed AXA that the agreement continued. The points of claim further asserted that the express provision for ending the agreement upon three months’ notice had been agreed as applying only in the event that the claimant was unable to comply with the applicable code of practice. It was asserted that UAP had represented that they would not rely upon or attempt to give three months’ notice unless such circumstances applied, but instead would give reasonable notice (averred to be one year).

Particulars of damage claimed loss of profit for the period of one year from the date of proceedings on the basis that the agreement had been affirmed, or one year from the date of repudiation if it were found that the repudiation had been accepted. In the alternative the claim was for three months’ loss of profit from 2^nd May 2000.

By their amended defence AXA averred that no representations were made in relation to length of notice, and that the agreement was terminable on three months’ notice. In addition, the defence asserted:-

For the proceedings then on foot, RMS instructed Mr John Green of Pierce, chartered accountants, to prepare an expert’s report. He produced a report dated 18^th July 2001 in which he stated that his firm had been specifically instructed to calculate (1) the profitability of RMS prior to the termination of its trading relationship with AXA, (2) whether there was any loss of profit in the period prior to 30^th April 2000; (3) the loss of profits in the three months ended 31^st July 2000; (4) the loss of profits in the twelve months ended 30^th April 2000.

In the report Mr Green did calculate profitability prior to termination but noted that there had been a very significant increase in vehicle recoveries so far as RMS was concerned in the first three months of 2000. Thus he did two calculations of profitability for the period immediately prior to 28^th April 2000, one without making any adjustment for the increase and one on the basis of an adjustment for the increase in recovery of vehicles.

In his report he assessed the loss of profits for the three months ending 31^st July 2000 at £64,664 and for twelve months ending 30^th April 2001 at £360,400. There are important features as to how he reached those figures. First he recognised that he had to deal with the fact that 524 vehicles had been transferred to RMS with AXA waiving any charges that RMS might have to pay. At paragraph 208-212 of the report he said this:-

He also took the transfer of these 524 [or, as it later became, 534] vehicles into account in other ways. First in calculating profitability prior to termination he excluded the month of April 2000, both because of a significant drop in the number of recoveries by RMS and in addition because RMS did not pay AXA for the vehicles cleared in that month. (See para 403). Having then calculated profitability for the period prior to termination (with that exclusion), he calculated what should have been the profits for the three month period following termination. In making that calculation he recognised that the position in respect of loss of profits after 28^th April 2000 was complicated by the manner in which RMS and AXA reached agreement in respect of the stock of vehicles held by RMS at 30^th April 2000, awaiting settlement by AXA. (See para 506). His instructions were as recorded in paragraph 508 that:-

Mr Green then calculated the value of the 534 vehicles at £93,750. He then expressed the view that since RMS did not pay for any vehicles acquired for AXA in the period after 31^st March 2000, that the monthly trading figures were distorted. Thus he rationalised the trading figures in this period by increasing the cost of sales by £93,750 being the cost of the vehicles waived by AXA. That adjustment to the trading figures post-termination enabled him to reach the conclusion that, in the result there was a significant decrease in gross profit in the period during and after termination of the trading relationship, compared with the gross profit of £39,819 per month, achieved previously. (See para 516). He furthermore did not bring into account the storage charges recovered under the agreement which he thought had taken place. He was of the view that certain charges would have been made at the termination of the contract whenever it had taken place and thus they should not be deducted from the one-off credit from the calculation of loss. His ultimate calculation compared “the anticipated gross profit with the actual gross profit in the period as adjusted for the waived vehicle charges” and he concluded that the loss of profits for the three months ended 31^st July 2000 was £66,335, being the difference between the anticipated gross profit of £144,123 and the actual gross profit of £77,788.

I should make two comments at this stage. First, Mr Green’s presumptions depended on accurate instructions from RMS. They also depended on an analysis of the proper construction of the salvage contract. Under the salvage contract, if there was a rightful termination, there would in effect be a “run-off” under which the contract would proceed as it had before. In such a situation, so far as the contract was concerned, there was no entitlement on RMS to levy storage charges in relation to the vehicles it collected; at most it had some right to negotiate if there were excessive periods of storage a reduction in the value of the vehicles. Furthermore, correspondence immediately post-termination would indicate that RMS had never asserted a right to storage charges in relation to vehicles they had collected. By letter dated 3^rd May 2000 (page 84) RMS had made it clear to AXA that they would make charges in respect of vehicles they were asked to collect after the termination date, but equally made clear that the charges were not to apply to vehicles for which they had received collection instructions prior to the termination date. A later note of October 2000, written at a time when AXA was suggesting that a complete compromise had been reached (supplied after the hearing before us and numbered 86A and B of the trial bundle), contained the following paragraph on page 86B:-

On 17^th October 2001 certain preliminary issues were ordered to be tried by District Judge Gosnell. The issues to be tried separately were:-

On 5^th September 2002 those preliminary issues were due to be tried by Mr Recorder Storey QC but on that date AXA submitted to the following order:-

Following that order, further experts’ reports were exchanged. First, Mr Green, simply following the basis on which he had previously calculated loss of profits for periods of three and twelve months, now by simple arithmetic calculated profits for the period of six months. On the basis of his previous report he calculated anticipated gross profit for the six months May to October 2000 at £312,915, from which he deducted the actual gross profit achieved as calculated in his previous report at £143,400. He then made certain minor adjustments reflecting additional costs to achieve the higher turnover and calculated the loss of profit at £157,829 (see para 309 of his second report).

The defendants then produced an expert’s report from Mr Martin Long of RSM Robson Rhodes LLP. That report, dated 30^th January 2004, calculated RMS’ profits for the period of six months. There were not substantial differences, either between the anticipated gross profit or the actual gross profit to be deducted. The main difference between the estimates of the two experts at this stage related to, what were described in Mr Long’s report as “waived costs due to AXA” of £93,750. Mr Long summarised the main differences between his estimate and that derived from Mr Green as:-

Mr Long, from paragraphs 4.27 through to 4.47 of his report, gave his reasons for expressing the view he did. Those paragraphs are in large measure totally inappropriate for an expert’s report. He purported to analyse the witness statements given by the parties and sought to express a view as to the likelihood of one or other of the parties being right. He explained his view of what the contract provided for and ultimately concluded with a paragraph:-

The battle of the experts was not however yet over. By letter dated 29^th January 2004 Mr Green changed his view as to the basis on which profits over the six month period should be calculated. He expressed the view that having seen financial statements for the years ending 31^st December 2001 and 31^st December 2002 that his previous calculation had underestimated the actual loss of profits. The theme of his third report was that it was inappropriate to look at the particular period, 1^st May to 31^st October 2000, because, if the contract had continued for that six month period, the losses would actually have been suffered at some later date. Thus it was his opinion that:-

In order to make his calculation he also made this point:-

In making his new calculation, Mr Green did make certain other adjustments which are not material for present purposes.

In this report again, however, reference was made to the transfer of the remaining vehicles. From paragraphs 4.1 through to 4.23 Mr Green also introduced matters which seem to me quite inappropriate for an expert’s report. He expressed views on negotiations between Mr Stansfield and the representative from AXA, drew attention to clauses in the contract, and sought to explain why RMS and AXA agreed that AXA would not charge the normal £93,750 for the 534 vehicles remaining and why this agreement was acceptable to them both (see para 4.18).

There was a dispute about whether Mr Green’s third report should be admissible in evidence but in any event it produced a further supplementary report from Mr Long dated 28^th May 2004. That report commented on the alternative interpretation it was suggested Mr Green was putting on the court’s order. It produced a calculation based on that new interpretation. It further still commented that Mr Long was of the view that the cost of the remaining vehicles should be deducted from any claim. The report pointed up, in a paragraph relied on by Mr Matovu before us, the following:-

It was on that basis that he suggested that his interpretation of the court order, which led to a quantum of £31,393, was a reasonable measure of loss.

The assessment of damages came on for hearing before His Honour Judge Kewshaw QC on Monday 9^th August 2005. On that day was produced a further report of Mr Long, which demonstrated that there were in fact more vehicles retained by RMS than the 534 previously identified. Having compared the two lists which had been exhibited to statements of Mr Stansfield as exhibits RS2 and RS8/1, it had been recognised that there was an overlap only to a very limited extent. There were 591 vehicles on RS8/RS1 and 534 on RS2. Mr Long had accepted Mr Green’s valuation of the 534 vehicles at £93,750 and estimated a conservative value for those additional vehicles contained on RS/RS1 at £80,000. Mr Long suggested his calculation was conservative and was intended “to reflect RMS’s case that a proportion of these vehicles had been held by RMS for some time by 5 June 2000”. (See para 28). Mr Stansfield of RMS had, in his statement exhibiting RS8/RS1, estimated the value of those vehicles at between £15,000 and £20,000.

The experts had also produced a joint statement dated 28^th July 2004. Paragraph 3 to paragraph 19 contained matters again quite inappropriate to an expert’s report, and in particular an expert’s joint report expressing views as to the meaning of a court order. The experts ultimately agreed it was a matter for the court as indeed it was.

The joint report did however contain useful suggested compromises in relation to quantum, leaving in effect to the judge two essential questions. First, the question whether the proper construction of the court order of 4^th September 2002 was that adopted as the basis of calculation by Mr Green in his third report or that adopted by both experts prior thereto; and second how the remaining AXA vehicles on the two lists were to be dealt with. Once again, the joint report addressed the position taken up by each of the clients, which is inappropriate to an expert’s report. But in essence RMS’s case (that no deduction fell to be made in relation to these outstanding vehicles) was on the basis that there had been a waiver of payment for these vehicles in settlement of the recovery and storage charges. AXA’s case, supported by Mr Long, was that albeit arithmetical calculations could be agreed, Mr Green’s view that no deduction should be made was wrong.

So far as the parties were concerned there were two issues which needed resolution. The first was whether Mr Green’s approach in his third report was the correct approach on the basis of the consent order made and the second was how the cars on the two lists and their value should be dealt with. As regards the first issue, the judge clearly ruled in favour of RMS. There is thus no need to deal with that aspect further.

In relation to the cars on the two lists, when the judge came to hand down his judgment in writing, many months after the hearing, he held that “it was common ground” that there should be no deduction from the damages assessed on the basis of Mr Green’s third report. How he came so to rule is quite unclear unless, having regard to the delay between the hearing and completing his judgment, he had overlooked paragraphs in the experts’ reports. The result was an award of £261,000, less a small sum flowing from mitigation.

What is still more unfortunate is that the solicitors for AXA wrote a letter to the court on receipt of a draft of the judgment which the judge was proposing to hand down, pointing out that the matter was not common ground, and pointing out that this aspect had not been dealt with in the judgment. For reasons which are still unclear to me either the judge was not shown this letter or failed to take in its contents. The letter raised a point about whether the sealing of the draft handed to the parties had been intended; that aspect apparently had been dealt with; but the key part of the letter was for some reason overlooked.

When the judgment was ultimately to be handed down on 27^th April 2005, Mr Matovu, in seeking permission from the judge to appeal, again drew attention to the fact that this aspect had not been dealt with in the judgment. Mr Latimer, for RMS, submitted to the judge, as he had submitted at the original hearing, that the question whether payment was due to AXA for these cars was something quite separate and distinct from the question whether a deduction from damages should be made and thus suggested that the judge was right not to deal with the matter. He also submitted, however, that if AXA wished the matter to be explained in the judgment then the right course was to adjourn the matter to allow the judge so to do. However, the judge, by this stage, had dealt with questions of costs and thus had seen Part 36 offers. The judge therefore gave AXA the opportunity to consider whether they wanted him to deal with the point or whether AXA would prefer to take their chances in the Court of Appeal. Mr Matovu was not in a position to take instructions and the matter was adjourned.

By letter dated 4^th May 2005 the court was informed that AXA preferred the judge not to deal with the matter, preferring the Court of Appeal to determine the outstanding issue between the parties. A request was therefore made for the judge to formally hand down his judgment, to determine AXA’s application for permission to appeal, which was part heard, and to make a final order reflecting the judge’s decisions relating to interests, costs and AXA’s application for permission to appeal.

It took until 8^th September 2005 for the matter to be restored before the judge, when he made his final orders including refusing permission to appeal. It hardly needs to be said that the gap between the hearing, which finished in the first half of August 2004, and 17^th February 2005, when the first draft of the judge’s judgment was provided to the parties, is quite unacceptable. A further delay until 27^th April 2005 is also unacceptable. The delay between 27^th April 2005 when the matter was adjourned until 8^th September 2005 was also intolerable. A further unsatisfactory feature in my view is that the judge gave full reasons for refusing permission to appeal, explaining that he did not deal with the vehicle point because “that . . . . was not part of the court’s task. Indeed, as counsel for the claimant put it, correctly in my judgment, any sum due from C to D for release of vehicles, but not paid, would not be damages at all but debts.” Whether or not that point is a good one it is certainly not the basis on which the judge had not dealt with the point in his judgment.

Without any assistance from the judge’s judgment we have had to approach the matter afresh. In approaching the matter afresh it has seemed to me that the judge may not have been helped by a failure to identify with any precision what the issue was.

Mr Latimer in his skeleton argument before the judge identified this issue in the following words:-

He then said:-

In Mr Matovu’s skeleton he put the issue in this way at para 28 and onwards:-

It seems to me that what is not addressed in either of the above submissions is the true effect of the agreed order of 4^th September 2004. Was Mr Latimer really right in suggesting that, in making the compromise they did on 4^th September 2004, the parties intended that the question whether AXA should receive payment for these vehicles should still be left outstanding as a possible debt? If the parties did leave the question whether monies were due as a debt for the vehicles outstanding, was Mr Latimer right in submitting that the agreement recorded by letter of 3^rd July 2000 could still affect the question whether sums were due? Was Mr Matovu right in suggesting that Mr Green’s arguments, as opposed to the evidence of what people had actually agreed, could in any way be relevant? Was Mr Matovu right in thinking that the parties had left over arguments on the proper construction of the salvage contract as to whether storage charges were due, and what deductions might be made from the value of vehicles as a result of excessive storage periods?

Once these matters had been addressed in argument before us, Mr Matovu and Mr Latimer appreciated that reliance on anything that was agreed in July 2000 had to be difficult for either side for the following reason. One thing which was clearly in issue between the parties prior to the order made on 4^th September 2004 was whether the whole dispute between the parties had been compromised by a financial settlement reached in July 2000. In the proceedings that were compromised by that order one side, RMS were suggesting that a narrow form of agreement had been reached, which did not compromise the whole action; and AXA were asserting that an agreement had been reached which did compromise the whole action. Without that matter being resolved, the parties agreed what they did on 4^th September 2004 and agreed that profits for a period of six months should be paid.

It seems to me that the following are the possibilities that flow from that compromise:-

that the compromise did not encompass the cars on the two lists and that liability in relation thereto is to be assessed as if no agreement had been reached in July 2000; i.e. AXA was (quite outside the assessment of damages) to be free to sue for a debt and RMS was to be free to set up storage charges in diminution;

the compromise did encompass the cars on the two lists and that AXA had agreed to make a one-off payment calculated by reference to six months’ profits, taking into account that RMS might have had a claim at trial to twelve months’ losses of profits, RMS might have had a claim to storage charges calculated by Mr Green in his first report at over £480,000, and AXA might have had a claim to the value of the cars, i.e. everything was to remain as it was without further payment by either side save that AXA would make a one-off payment calculated by reference to six months’ profits; or

an intermediate position that damages would be assessed on the basis of six months’ loss of profits, and if RMS could be shown to have benefited from the termination of the contract by virtue of the cars held by them, free of charge, credit should be given for whatever that value was, taking account of any extent to which that value would have been reduced by costs of excessive storage.

If the first suggestion were the effect of the compromise, that would amount to having agreed that, despite the compromise of 4^th September 2004, there remained to be fought out an action in which AXA would sue for the value of the motor cars and RMS would set up such claim as they might have for storage charges which they could deduct from the price. That seems to have been Mr Latimer’s primary submission in his skeleton argument before the judge, and the basis on which the judge refused permission to appeal. But I have to say that it seems to me most unlikely that the parties, in compromising in September 2004, would ever have thought that further litigation between them could follow.

Thus, it seems to me, the compromise in September 2004 must have included the motor cars remaining at RMS, and the real issue is whether suggestion (2) or suggestion (3) provides the right answer.

It is of some interest that the judge in calculating damages did make a deduction in relation to sums which RMS had earned in mitigation of their loss (see para 42 of his judgment). Mr Latimer had to accept in argument that if on the proper construction of the order made in September 2004 the order contemplated a one-off payment by reference to six months’ profits, and not an assessment of damages on normal principles, the judge may have been wrong to have made a deduction in relation to mitigation. But, whether the judge was right or wrong about that, Mr Latimer submitted that it was important to have in mind what the parties must have had in contemplation at the time of the compromise. There was a dispute about the price due for the motor cars; there was a dispute about storage charges; as well as a dispute about whether a compromise had been reached, and as to the proper length of notice. Mr Green’s report, already in the hands of AXA, demonstrated the issues that had arisen in relation to storage charges and the price of the motor cars. Mr Green’s report was suggesting that storage charges in the region of £480,000 might have been claimable by RMS. So, submitted Mr Latimer, on the proper construction of the order the intention must have been that the cars would stay where they were and a sum representing six months’ profits under the contract would be paid and that would be the end of the matter.

Mr Matovu submitted that that could not have been the intention of the parties. He took us to the terms of the salvage contract, pointing out that so far as storage charges were concerned, no charges could be made in relation to vehicles remaining at RMS. Furthermore he submitted RMS had never purported to seek sums for storage charges for vehicles collected by them. Mr Green’s suggestion of some £480,000 being due for storage charges was a nonsense. So far as excessive storage periods was concerned, they could only be relevant to the value of the cars payable by RMS to AXA. Mr Matovu indeed suggested that the clause providing for “discussion”, where there was excessive storage, was in fact unenforceable, but on any view he submitted excessive storage could only go to value. So far as one list was concerned, the 534 vehicles, he submitted it was common ground between the parties that the value was £93,750. As regards the other list, Mr Long’s calculation was a value of £80,000, even, as Mr Long suggested, taking account of some excessive periods of storage. On Mr Stansfield’s evidence, the value of those vehicles was between £15,000 and £20,000.

Mr Matovu posed the question – could it have been intended that RMS should be entitled to trade with the free vehicles and make profits therefrom and obtain six months’ loss of profits without giving any credit for the benefit of the vehicles that it had obtained. He took us to British Westinghouse Electric and Manufacturing Co v Underground Electric Railways Co London Ltd [1912] AC 673, in particular passages in the speech of Viscount Haldane at 684 and 688-689. He particularly identified a passage at 689 where Viscount Haldane quotes a passage from the judgment of James LJ in Dunkirk Colliery v Lever (1878) 9 Ch D 20 at page 25 and then says:-

British Westinghouse was concerned with mitigation but Mr Matovu submitted that the principle that the benefit obtained as a result of a breach of contract must be brought into account when assessing damages is as applicable where a party has mitigated his loss as in this type of case. In this case, he submitted, as a result of the breach of contract, RMS have in fact obtained a benefit, being the value of the cars for which they have not paid, whatever that value is.

It seems to me that Mr Matovu must be right to this extent. It cannot have been intended by the compromise reached in September 2004 that RMS should not have to bring into account any benefit gained from the breach of contract. Paragraph 1 of the order of 4^th September 2002 orders that “there be an assessment of damages in respect of the liability admitted . . . ”. The admission of liability to the claimant “in respect of six months’ loss of profits between 1^st May 2000 and 31^st October 2000” is again consistent with the obligation on the court being to assess damages. If a court is to assess damages then it seems to me that benefits flowing from the termination of the contract must be included in the calculation of loss. In this instance, RMS have benefited to the extent of the value (whatever that is) of the cars that they have retained.

In assessing the value or benefit neither RMS nor AXA are entitled to refer to any agreement reached in July 2000. That must be so because AXA must be precluded from contending that a full compromise was reached; and, if they are so precluded, equally RMS must be precluded from seeking to suggest that the agreement was to some narrower bargain. Once there can be no reliance on any agreement reached in July 2000, an assessment must be done simply by reference to whether RMS has obtained a benefit. That assessment (and this is not unimportant) can still include the possibility that retention of cars without payment is not accurately reflected by the full value of the cars, having regard to excessive periods of storage also caused by termination, which would have, in practice, led to a reduction in value.

As to Mr Matovu’s suggestion that the clause in the salvage contract (which contemplated “discussions” as to a reduction in the salvage value) was a clause which was unenforceable, that seems to me not to be a relevant consideration, because what one is seeking to assess is benefit actually obtained by RMS.

It seems to me there is force in the argument that a benefit of £93,750 is clear, that being the agreed value of the list of 534 vehicles. The extent to which a further sum is to be added for the second list is less clear. The difference between the parties is the difference between a figure of £15,000 to £20,000 and £80,000. My understanding is that in the interests of saving further costs, both parties would prefer us to take a view as to the appropriate figure rather than send the matter back, either to a court or to an arbitrator. An appropriate figure seems to me to be one of £50,000 and I would thus hold that, from the damages assessed by the judge, the sum of £143,750 falls to be deducted.

For the reasons I have given I would allow the appeal to the extent indicated.