Hirtenstein & Anor v Hill Dickinson LLP

At 14.14 (UK time (Footnote: ¹)) on 16 July 2010 the second claimant, a company newly incorporated in the Cayman Islands and beneficially owned by the first claimant, Mr Michael Hirtenstein, completed the purchase of a motor yacht which was then re-named “Il Sole” (“the Yacht”). About an hour later and 12 miles out to sea, the starboard engine of the Yacht suffered a major failure. The claimants had bought the Yacht without a survey or sea trial, but with a warranty of the Yacht’s condition given by the seller, Candyscape Ltd. Mr Hirtenstein believed that the warranty was backed by a personal guarantee from Mr Christian Candy, the beneficial owner of the selling company. Mr Hirtenstein believed this because he had been told it only a few hours earlier by his solicitor, Mr James Lawson of Hill Dickinson LLP, the defendant in this action.

Although Mr Lawson thought that he had obtained a personal guarantee from Mr Candy which backed the warranty in the sale contract, in fact he had not. He had made a blunder. On the wording which had been agreed, such a contention was not even arguable.

A claim for breach of warranty was subsequently advanced by Hill Dickinson on behalf of the claimants in correspondence with the solicitors acting for the seller. However, in March 2011 Hill Dickinson received notice that Candyscape Ltd was being put into liquidation. Hill Dickinson then turned their attention to Mr Candy. They wrote him a letter dated 18 May 2011 asserting a claim against him personally under his guarantee. Mr Candy’s solicitors replied on 2 June 2011 pointing out that the guarantee did not cover the warranty of the Yacht’s condition included in the sale contract. Mr Lawson immediately recognised that this was correct and that the proposed claim under the guarantee was therefore fatally flawed. He explained this to Mr Hirtenstein on 8 June 2011.

In this action the claimants are suing Hill Dickinson for professional negligence in handling the purchase of the Yacht. They allege that Hill Dickinson negligently failed to obtain a personal guarantee under which a successful claim could have been made for loss resulting from the defective condition of the Yacht at the time of delivery. They further contend that, had Mr Hirtenstein been told that there was no such personal guarantee, he would not have proceeded with the purchase and he has thereby suffered loss.

Hill Dickinson admit that Mr Lawson was negligent in believing and informing Mr Hirtenstein that he had obtained a personal guarantee which covered the condition of the Yacht. But they deny that this negligence had any causative effect. Their case, in brief, is that Mr Lawson was not instructed to seek a personal guarantee and only told Mr Hirtenstein that he had got one after contracts had been exchanged and Mr Hirtenstein’s company was contractually committed to buy the Yacht. They contend that there was no realistic chance that Mr Candy would have agreed to provide a personal guarantee covering the condition of the Yacht and that, if Mr Hirtenstein had been told this, he would nevertheless have gone ahead with the purchase. Hill Dickinson further deny that the claimants suffered any loss as a result of entering into the transaction and also argue that the value of a claim under any personal guarantee would have been far less than the claimants maintain.

The main witnesses of fact who gave evidence at the trial were Mr Hirtenstein and Mr Lawson. There was extensive and not always helpful expert evidence adduced on the subjects of: (1) the nature and scope of the damage to the Yacht; (2) the value of the Yacht; and (3) the Yacht’s chartering capacity.

Before addressing the issues in dispute, I will first give an outline of the relevant factual history, focusing mainly on the negotiations for the sale and purchase of the Yacht.

The Yacht is a 46.76m luxury motor yacht built by the Benetti Yard and launched in 1994. There is accommodation for 12 guests and 10 crew.

The Yacht was purchased in 2005 by Candyscape Ltd, a company established in the Isle of Man by Mr Christian Candy specially for that purpose, for US$12.45m, and was lavishly refurbished. Mr Candy and his brother are property developers who specialise in building and fitting out luxury residential properties to an exceptionally high standard. While owned by Candyscape Ltd, the Yacht was named “Candyscape”.

According to researches carried out by the claimant’s valuation expert, Mr Gilmour, the Yacht was offered for sale in May 2008 through yacht brokers, Edmiston & Company SAM, at an asking price of €17m. Three months later the price was reduced to €14.95m. In 2009, Mr Candy took delivery of a new yacht, “Candyscape II”. In October 2009 Edmiston was advertising the Yacht for sale at an asking price of €9.95m. In April 2010, the Yacht was advertised for sale at €6.95m. These reductions in asking price were made against the background of a collapse in the market for luxury yachts following the financial crisis.

Mr Hirtenstein is a successful businessman who lives in New York. Over the years he had chartered luxury yachts for vacations and, through such chartering, came across the yacht brokers, Edmiston. By early 2009, he had decided to buy a luxury motor yacht for his own use (and with the aim of covering some of the running costs by chartering). He approached Edmiston to help him find a suitable boat. His main contact at Edmiston was a senior broker, Mr Christopher Cecil-Wright.

Mr Hirtenstein first expressed interest in the Yacht in March 2009. Subsequently:

In early June 2010 Mr Candy accepted an offer of €5.75m for the Yacht from another buyer, subject to a sea trial and survey which was scheduled to take place by 21 June 2010. Mr Lawson, a partner at Hill Dickinson who specialises in legal work relating to yachts, acted for the buyer in this transaction.

The contract of sale was on the standard form of Memorandum of Agreement (“MoA”) approved by the Mediterranean Yacht Brokers Association (“MYBA”) which, according to Mr Lawson, governs almost every yacht sale made in Europe and the Mediterranean. Clause 15 of the standard form of MoA contains a warranty from the seller that at the time of delivery the vessel will be “free and clear of all debts, claims, liens and encumbrances of any kind whatsoever”, together with a warranty of the seller’s title to the vessel. The terms of the standard MoA provide for a sea trial and condition survey but expressly exclude any warranty of the vessel’s condition. Clause 34 states:

“Save as provided for in Clause 15, every representation, condition, warranty or other undertaking whether expressed or implied by statute, common law, custom or otherwise howsoever in relation to the VESSEL, fault or errors in her description or her quality or her fitness, for any particular purpose whether made or given before or after the date of this Agreement, are hereby excluded for all purposes.”

The standard form of MoA is accompanied by a standard form of personal guarantee and indemnity. The reason for requiring a personal guarantee is that large motor yachts are typically owned by special purpose companies. Once the yacht has been sold, such a company will have parted with its only asset and a claim against it is therefore likely to be worthless. The MYBA standard form of personal guarantee contains a warranty in the same terms as clause 15 of the standard form of MoA.

The solicitors acting for Candyscape Ltd and Mr Candy in relation to the sale of the Yacht were the firm of Clark Ricketts LLP. On behalf of Mr Candy they negotiated a number of changes to the standard wording of the guarantee. The effect of most of these changes was to attenuate somewhat the undertakings given by the guarantor. For example, an undertaking to use “utmost” endeavours to procure the release of the vessel from an arrest resulting from any prior lien was replaced by an undertaking to use “all reasonable” endeavours.

Contracts were exchanged on 18 June 2010. However, on 20 June 2010 the prospective buyer carried out a visual inspection of the Yacht and decided not to proceed with the purchase. As the standard terms of the MoA give the buyer an unqualified right of rejection following the sea trial, which had not yet taken place, the seller had no practical choice other than to agree to cancel the contract.

It is against this background that the Yacht came to be offered for sale to Mr Hirtenstein in July 2010 at a price which Mr Hirtenstein found too good to refuse.

It was Mr Lawson’s evidence that on Sunday 11 July 2010 he received a telephone call from Mr Cecil-Wright of Edmiston who asked whether, as a favour, Mr Lawson would act on the urgent purchase of the Yacht by one of Edmiston’s clients. According to Mr Lawson, Mr Cecil-Wright said that the Yacht was being bought at a rock bottom price which the seller had reluctantly accepted on condition that the sale would take place on an “as is, where is” basis and be completed by the end of the week. As Mr Lawson had acted on the previous abortive purchase and therefore had much of the documentation in place, this would make it easier to complete the new transaction in such a short time frame. Nevertheless, Mr Lawson was extremely busy at the time and regarded this request as a “big ask”.

I have no reason to doubt that such a telephone call took place. Mr Lawson said that he distinctly remembers it being on the Sunday because he was driving on the M6 at the time with his young children in the car, one of whom was being sick, and the last thing he wanted was to speak to a broker with a new instruction. If Mr Lawson is right about the date, which I accept that he probably is, then it is of interest that this call took place before Mr Cecil-Wright had actually made the offer to Mr Hirtenstein which he presented to Mr Lawson as though it had already been accepted.

On Monday 12 July 2010 the offer was made by Mr Cecil-Wright (CCW) and was accepted by Mr Hirtenstein (MH) in the following email communications:

“17:01 CCW to MH:

“Would you do an ‘As Is Where Lies’ deal on CANDYSCAPE right now at Euro 4.5!!!!!!!??”

17:08 MH to CCW:

“Whoa!!! I sure would strongly consider that … I would want to first come see her in person, what if I came this time next week? Is she sea worthy in the water, with crew? Or dry docked somewhere under wraps?”

17:25 CCW to MH:

“Think she will probably be gone at the level I just suggested. I have this deal from another broker but it is so good I wanted you to have a chance.

She is absolutely ready to go apart from crew. We could have a crew on board in less than a week. You could cruise from mid July for the rest of the season.”

17:51 MH to CCW:

“Ok … let’s do it!!!!!”

18:12 CCW to MH:

“Nice one. I’ll prepare an MOA, do you have a company to own it? Do you have a lawyer to help me? If not I would recommend James Lawson at Hill Dickinson in London. He is really detailed, very competent in this type of transaction and great value. …”

In a further email sent at 20.06 Mr Hirtenstein asked: “Why the Candy’s emergency fire sale on the boat right now?” Mr Cecil-Wright replied:

“Candy just wants out and knows if he misses the summer he will hold til the autumn. Just says he wants out.

They just got a big ruling in their favour in the high court so he can easily afford the loss he is making”

The “big ruling” to which Mr Cecil-Wright was referring must have been the judgment given on 25 June 2010 in CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch), in which a company owned by Mr Candy appears to have been substantially successful, although the judgment did not result in any immediate award of damages.

It is clear from the emails that, just after this message was sent, Mr Hirtenstein spoke on the telephone to Mr Cecil-Wright. According to Mr Hirtenstein’s evidence, Mr Cecil-Wright told him that the Yacht was in perfect condition and that Mr Candy had spent around €1m in refitting the Yacht over the winter of 2009/2010. There is no contemporaneous written record of this statement. Mr Hirtenstein’s evidence is consistent, however, with evidence given by Mr Lawson that Mr Cecil-Wright told him in their conversation on Sunday 11 July 2010 that Mr Candy had spent €1m on the cosmetic maintenance and upgrading of the Yacht during the previous winter. Despite the coincidence of this evidence, I have some doubt about whether a figure of €1m was specifically mentioned. In an email sent to Mr Candy at 13.22 on 14 July 2010 Mr Hirtenstein asked:

“… can you quickly update me on what expenditures you made over the winter, CCW mentioned you put a fair amount of money into the boat which I commend you for, it would be nice to know approx how much and on what?”

It seems surprising that Mr Hirtenstein should refer to “a fair amount of money” and ask “approx how much”, if a figure of €1m had been specifically mentioned.

Mr Candy replied to that email saying that he would get the captain of the Yacht to send Mr Hirtenstein a summary of the expenditure. However, no such summary was sent and the request was not followed up. In September 2010, when the Yacht was being surveyed for the purpose of repairs, Mr Hirtenstein asked Edmiston for a list of all the work done on the Yacht just prior to the summer and referred in this context to the sum of €1m which he said had been stated at the time of sale by Mr Cecil-Wright. A list was then provided by Edmiston which showed that the total cost of the work was only €198,000. Mr Hirtenstein took this up with Mr Cecil-Wright who did not dispute having told Mr Hirtenstein at the time of the sale that Mr Candy had spent close to $1m (sic) the previous winter in ensuring that the Yacht was perfect in every respect. Mr Cecil-Wright said that this was what he had been told by Mr Candy.

I find that a representation was made by Mr Cecil-Wright to Mr Hirtenstein when they spoke on Monday 12 July 2010 that Mr Candy had spent a large amount of money on the Yacht the previous winter to ensure that she was in perfect condition. I am also prepared (despite my doubts) to accept that a figure of €1m was probably mentioned. I infer that in the same telephone conversation Mr Hirtenstein must also have confirmed that he would like to instruct Hill Dickinson to handle the legal work involved in the purchase.

Shortly after speaking to Mr Cecil-Wright, Mr Hirtenstein contacted Mr Candy by email (at 21.11). He said:

“Hey Chris … I have agreed to your terms of $4.5 mm euros and I’m prepared to close quickly so I can use her next week …

I hope you know I’ll do my best to keep her in the same beautiful condition that you always did …

My word is as good as a signed contract so unless you change your mind consider this deal DONE!

Let me know your thoughts or what subtleties I may want to know about the boat since I understand I’m taking her ‘as is, where is’…

Btw, it is my intention of telling anyone who asks what I paid that I have a confidentiality agreement about price, etc, so no one will ever know unless there is some sort of yacht supervisory record that people have access.”

Mr Candy replied confirming that “we have an agreed deal at €4.5m” and that “contracts are all ready and she is good to go”. He also agreed to the suggestion that the price should be kept confidential. Mr Hirtenstein in making that suggestion was clearly indicating that he recognised the price as being much lower than the outside world would expect.

Hill Dickinson were instructed by an email from Mr Cecil-Wright to Mr Lawson, copied to Mr Hirtenstein, sent at 09.09 on Tuesday 13 July 2010 asking if Mr Lawson could do an “as is, where is” deal for him on the Yacht to be closed on the Friday. Mr Hirtenstein made direct contact with Mr Lawson by email at 09.34 (04.34 New York time) and proposed a call at noon New York time that day.

Mr Lawson sent an email to Mr Hirtenstein at 11.39 thanking him for the instructions and indicating that there was a lot of work to do in a very short time. He asked for confirmation of five points, one of them being “confirmation that you are happy to proceed on an as is, where is basis”.

A call was arranged for 16.00 (11.00 New York time). It is common ground that Mr Hirtenstein and Mr Lawson spoke on the telephone then and that a further telephone conversation between them took place some four hours later at 20.00. There is a dispute as to what was said in these conversations about seeking contractual protection for Mr Hirtenstein in relation to condition of the Yacht. This is an important issue in the case to which I will revert.

At 11.16 on Wednesday 14 July 2010 Mr Lawson sent to the seller’s solicitors, Clark Ricketts, draft contractual documentation. Addendum 1 to the MoA and the personal guarantee were in the same form as the drafts which had been agreed for the previous aborted transaction. Addendum 2, as Mr Lawson pointed out in his covering email, was different and, in his description, “takes into account the nature of this transaction”. Addendum 2 contained proposed amendments to the standard terms of the MoA and included at paragraph 5 the following additional clause:

“The BUYER agrees to buy the VESSEL its gear and equipment on an ‘as is and where is’ basis save that the SELLER warrants and represents to the BUYER (and such representations and warranties are hereby deemed to be included in Clause 15 of the Agreement), that the VESSEL its gear and equipment is all in good mechanical and cosmetic condition and of a general quality and standard as would be expected of an asset within the Candy and Candy brand and ready in all respects for immediate private or commercial use by the BUYER or its guests. ...” [underlining added]

Mr Lawson has explained that, when he drafted this clause, he had in his mind a mistaken belief that the standard MYBA wording for the personal guarantee makes specific reference to clause 15 of the MoA. Mr Lawson accordingly thought that, by deeming his proposed warranty of the Yacht’s condition to be included in clause 15 of the MoA, he was incorporating the warranty by reference into the guarantee. He was, however, mistaken because, although the guarantee contains a clause in the same terms as clause 15 of the MoA, that clause does not cross-refer to clause 15 of the MoA.

Shortly after noon (UK time) there was an exchange of emails between Mr Candy and Mr Hirstenstein in which they discussed the timescale for closing the transaction:

“12.34

CC to MH:

“Re exchange, if funds arrive today, we should be able to exchange today. I have just been through the contract that James [Lawson] has sent over, and my view is that apart from a few small points, we should have no major issues.”

12.47

MH to CC:

“I am still waiting for the contract to review so I’ll get that soon and I am also getting 3 insurance quotes so I think Friday to close as planned still makes sense.”

13.04

CC to MH:

“I am relaxed whether you want to close today, tomorrow or Friday. You gave me your word, and that is good enough for me ...”

13.21

MH to CCW:

“I would close sooner but from past experience when I wire US funds overseas it doesn’t seem to clear the same day ...”

Mr Hirtenstein copied this last email (which included the preceding exchange) to Mr Lawson, saying:

“James, see the exchange below and send me an email with your thoughts, as well as a copy of the latest round of contracts so I can review this morning.”

At 14.41 Mr Lawson sent his drafts of the MoA, Addenda 1 and 2 and the personal guarantee to Mr Hirtenstein. In his email Mr Lawson expressed concern about getting the transaction closed on the Friday, which he described as “pushing things to the extreme”. He pointed out, amongst other things, that they had not yet agreed the contractual documents and that Mr Hirtenstein had not yet incorporated a buying company.

At 15.11 Mr Lawson sent Hill Dickinson’s formal retainer letter by email to Mr Hirtenstein’s accountant, Mr Gould. The retainer letter was addressed to Mr Hirtenstein and was immediately forwarded to him by Mr Gould. The letter contained the following record of Mr Hirtenstein’s instructions:

“Your urgent instructions were to draft, negotiate and finalise the sale and purchase agreement and closing documentation, oversee closing itself, handle registration of the Yacht on the Cayman Islands Shipping Registry, advise on a suitable vehicle for ownership, provide an indication as to VAT liability and mitigation and generally to protect Michael’s interests as far as possible given the timescale available.”

The retainer letter also attached Hill Dickinson’s standard terms of business. Clause 15 of those standard terms, headed “limitation of liability”, includes a provision that:

“Hill Dickinson LLP’s liability for any one claim or series of connected claims shall not exceed £3 million.”

Hill Dickinson seek to rely on this clause, if necessary, to limit their liability for the present claim.

At 17.14 Clark Ricketts sent by email to Mr Lawson their comments on the draft contractual documents. They said that they had no comments on Addendum 1 or the personal guarantee. Addendum 2 was also largely agreed, save for paragraph 5. Clark Ricketts objected to the proposed warranty of the Yacht’s condition on the ground that “this is an ‘as is, where is’ purchase” and said:

“Whilst we understand the vessel is in very good condition, due regard must be given to the fact that it is of a certain age and has been used on a regular basis both privately and on charter, something which is reflected in the price of the vessel.”

Mr Lawson replied at 17.24 saying:

“The wording you are seeking to delete was a specific request of the Buying B[eneficial] O[wner] – indeed, he wanted far stronger wording as he has relied on representations for Seller and Broker but I persuaded him to accept what is in essence as one would expect. I’m afraid it will not be possible to delete or dilute this wording.”

Shortly after sending this email Mr Lawson spoke on the telephone to Mr Cornwall of Clark Ricketts who said that the seller would be prepared to accept Mr Lawson’s proposed wording of paragraph 5 of Addendum 2 provided the words “having due regard to the year of build of the vessel” were added.

At 18.11 Mr Lawson emailed Mr Hirtenstein to inform him, by way of update and in case Mr Candy should contact him directly, that Mr Candy (via his lawyers) was “pushing back” on the wording of paragraph 5 of Addendum 2. Mr Lawson wrote:

“I told his lawyer this was paramount to us as we are relying on assurances from both [Mr Candy] and [Mr Cecil-Wright] regarding the condition and maintenance of the yacht.”

Mr Lawson then set out in his email the text of his draft warranty underlining the words which Mr Candy’s solicitor wanted to delete. Mr Lawson continued:

“I told him it was out of the question.

The lawyer then tried to dilute the reps and warranties slightly by adding where I have marked [*] the words ‘having due regard to the year of build of the Vessel’. This has the effect of negating anything you have been told in relation to the expensive maintenance of the yacht to keep it in a decent condition.

Their point is that we should not be able to hold them to deliver a brand-new C&C asset which is not what we are after and not what the wording says.

They have gone back to [Mr Candy] on this point. Everything else is agreed.”

Five minutes later, at 18.16 Mr Hirtenstein replied:

“Simply tell them I am not negotiable on this point … no way I pay this much without these assurances so let them know.”

At 18.18 Mr Cornwall sent an email to Mr Lawson confirming that Mr Candy was happy to leave paragraph 5 of Addendum 2 as drafted, but had asked that the words “having due regard to the age of the vessel” be added. Mr Lawson responded at 18.20 to say that, having taken instructions, the point was non-negotiable: the additional wording was not acceptable and paragraph 5 had to remain as drafted. At 18.55 Mr Cornwall informed Mr Lawson that his client was happy to proceed with the wording as drafted. Mr Lawson then reported to Mr Hirtenstein (at 19.09):

“They have agreed to our original wording and would like to sign tonight …”

At 19.27 Mr Hirtenstein asked Mr Lawson to re-send him the contractual documents so that he could “review and approve and sign”. Mr Lawson replied attaching the final versions of the MoA, Addendum 1 and Addendum 2. He did not attach the personal guarantee. Mr Hirtenstein’s personal assistant emailed Mr Lawson at 20.17 to confirm that the documents had been signed.

At 21.04 Mr Lawson sent through a copy of the personal guarantee, saying that he should have sent this before and asking if Mr Hirtenstein could initial each page. Mr Hirtenstein replied almost immediately to say:

“Wait … as a rule I never sign any personal guarantees and this was never discussed. My money was wired and I signed the MoA … that should suffice.”

Mr Lawson sent an email back to reassure Mr Hirtenstein that the guarantee was to be given by Mr Candy and that Mr Hirtenstein was just being asked to initial the agreed format. Mr Hirtenstein then immediately did so.

Contracts were duly exchanged the next day at 17.20. At 18.28 Mr Lawson emailed Mr Hirtenstein confirming that contracts had been exchanged and that the closing was set for lunch time on the Friday.

At 11.35 on the Friday Mr Lawson sent an email to Mr Gould and Mr Hirtenstein confirming the receipt of funds. He also told Mr Hirtenstein that he had now received details of the Yacht’s certification and that annual surveys would need to be carried out within three months either side of 31 August (being the expiry date of the certificates). Mr Lawson stated:

“Given what we all know of the yacht, I would expect her to pass the annual endorsements without significant work and we have a warranty from Seller backed by Chris Candy’s PG that the yacht is currently ready in all respects for commercial use.”

This was the first time that Mr Lawson had told Mr Hirtenstein that the warranty of the Yacht’s condition which had been included in the MoA was backed by Mr Candy’s personal guarantee.

Closing took place in international waters at 14.14. The pressure under which Mr Lawson had been working is apparent from an email that he sent to Mr Cecil-Wright at 14.32 with the subject “CLOSED!!!” Mr Lawson wrote:

“Bloody hell Chris that was pressurised. Two closings and two deliveries yesterday and we still get Candyscape done today in only three days! I am close to a breakdown though.

Thanks as ever for the instructions!”

Within the hour, the starboard engine of the Yacht had failed.

It is unnecessary for present purposes to describe in any detail the course of subsequent events. It is sufficient to mention a few salient points:

The principal issues in dispute are the following:

In approaching the issues of liability and causation, I draw from the factual history outlined above four important background points.

The first is that the Yacht was offered for sale to Mr Hirtenstein, and he agreed in principle to buy it, “as is, where is”. I would regard that phrase as self-explanatory. It clearly signified that the buyer would acquire the Yacht in whatever condition the boat was at the time of purchase with no right to complain subsequently if the boat should turn out to have any defect.

This is exactly what Mr Hirtenstein understood the phrase “as is, where is” to mean. As he explained in evidence:

“I didn’t know at the time what in the boat world that meant from a legal standpoint. I took it … almost like a property sort of thing, where I would be buying it with the way it is. … I am buying it with its beauty and the warts.”

Mr Hirtenstein’s understanding was also apparent at the time. In his email sent to Mr Candy on 12 July 2010 at 11.13, in which he confirmed his agreement to buy the Yacht on Mr Candy’s terms and emphasised his enthusiasm for the deal by stating “my word is as good as a signed contract”, Mr Hirtenstein went on to say:

“Let me know your thoughts or what subtleties I may want to know about the boat since I understand I am taking her ‘as is, where is’.”

I take Mr Hirtenstein here to be acknowledging that he was taking the risk of any fault in the Yacht’s condition and appealing to Mr Candy as a fair and honourable person to tell him of any fault or imperfection known to Mr Candy of which a buyer would want to be aware.

Mr Hirtenstein’s understanding of what it meant to buy the Yacht “as is, where is” was shared by Mr Lawson, a solicitor who is very experienced in this field. It would appear also to have been consistent with the general understanding in the yacht trade. That is evidenced by a standard form of addendum to the MYBA memorandum of agreement which is used for ‘as is, where is’ sales. This addendum provides that the buyer waives any right to a sea trial or condition survey and that “[a]ll express or implied warranties or conditions statutory or otherwise are hereby excluded”.

In Dalmare SPA v Union Maritime Ltd [2012] EWHC 3537 (Comm), [2013] 1 Lloyd’s Rep 509, paras 77-84, a case decided since the sale of the Yacht took place, Flaux J expressed a provisional view (obiter) that the words “as is” when included in a contract for the sale of goods are not by themselves sufficient to exclude the conditions as to satisfactory quality and fitness for purpose implied by the Sale of Goods Act, and only exclude the right to reject the goods for breach of those conditions. In a contract between commercial parties such an interpretation would seem to me to be generous to the buyer. Drawing such a distinction between the right to reject and the right to damages and treating the words “as is” as excluding the former but not the latter seems to me most unlikely to reflect the expectations of ordinary business people or to be an interpretation that would occur to anyone other than an ingenious lawyer.

In the present case, however, the question is not one of interpretation of the sale contract but simply one of the background understanding of the parties against which the contractual documentation was negotiated. I have no doubt that Mr Hirtenstein, Mr Candy, their solicitors, and the broker, Mr Cecil-Wright, all understood that buying the Yacht “as is, where is” meant that Mr Hirtenstein would get the Yacht in its existing condition, good or bad, with no subsequent recourse against the seller for any fault which the Yacht might turn out to have.

Secondly, however, although Mr Hirtenstein understood full well the meaning of buying the Yacht “as is, where is”, after his initial euphoria had died down and he began to think about the potential risks involved in the transaction, he wanted some assurance from Mr Candy regarding the Yacht’s condition. This began with the email sent on 12 July 2010 at 11.13 (referred to in paragraph 53 above) asking Mr Candy “what subtleties I may want to know about the boat” and culminated in the warranty requested by Hill Dickinson.

Mr Hirtenstein followed up his question about “subtleties” (which Mr Candy did not directly answer) with an email to Mr Candy on 13 July 2010 at 10.11 saying:

“... as far as the ‘as is’ part of the contract I do need some small assurances such as the boat is in proper sea worthy condition, there has been no damage, etc and detail whatever upgrades/improvements have been done the past 6 months … i.e. [Mr Cecil-Wright] told me you have almost new tender, jet ski, some electronics and so forth. That it comes fully furnished with bedding, linens, glassware etc.

Just so I know what I am actually getting and its basically a full turn key ready to use and charter yacht of this magnitude. Hopefully you don’t find issue with these sort of things since this was my understanding of the boat’s condition.”

Mr Candy replied (at 10:50):

“James, your lawyer will ensure you have the appropriate protections legally/contractually. Edmiston can give you all the historic works information.

The yacht comes as is, with all FFE [furniture/artwork/sculptures/linen/glassware/crockery/water sport equipment etc …] James [Lawson] has complete and up to date chattels lists. Basically you walk on next week, and she is good to go, either for charter or for your own use.”

Counsel for the claimants, Mr Reeve, argued that this email effectively amounted to an invitation from Mr Candy for Mr Hirtenstein to seek some form of contractual protection regarding the Yacht’s condition. However, it is apparent from two emails that Mr Candy sent to Mr Hirtenstein a little later in the same exchange that what Mr Candy had in mind was using the contract wording which had been negotiated between Hill Dickinson and his lawyers for the previous aborted transaction. That wording included clause 34 of the standard form of MoA which expressly excluded any warranty of the Yacht’s condition. Thus, in an email sent at 11.19 Mr Candy wrote:

“Our lawyer is reaching out to your lawyer now. We have an agreed form of contract that James is aware of, so your legal bill should be minimal, and a Friday closing is easily doable.”

Mr Candy then set out a plan for exchanging contracts on the Friday, releasing the bank charge, helping Mr Hirtenstein to recruit a crew and changing the name of the Yacht. Mr Hirtenstein replied (at 11.22): “Perfect plan”. Then, at 11.23 Mr Candy wrote:

“I understand the lawyers have just spoken. I understand the plan subject to you being happy with the agreed contract, is to sign the MOA tomorrow, so long as your lawyer is in funds. ...”

This plan plainly did not envisage any significant negotiation of the contract terms.

The third point is that the reason why Mr Hirtenstein was willing to buy the Yacht “as is, where is” within three days with no inspection was that he believed he was getting the Yacht at an absolute bargain price. His attitude at the time is apparent from an exchange of emails with his accountant, Mr Gould, on 13 July 2010. Mr Gould wrote:

“First off the yacht looks incredible. The site I went to shows various asking prices over the past several years. Am I correct in what I see that the yacht was recently listed for 17m Euros and you are getting it for 4.5m Euros?”

Mr Hirtenstein replied:

“YES!!! I am stealing this from the Candy brothers …”

He went on to say that the Yacht “should only retain or increase in value since I am stealing it.” He also pointed out that, with the weakening of the euro against the dollar, what was US$26+m when the asking price was €17m was now US$5.5m.

It is obvious that the opportunity to buy at such a knock down price a Yacht in which he had been interested for many months, and for which only three months previously he had offered €6m, is a deal which Mr Hirtenstein would not readily have relinquished.

The last point which I draw from the history of the purchase is that, once Mr Hirtenstein had made the decision to buy the Yacht within three days, his focus was on meeting that deadline and making sure that the Yacht was ready for him to use straight away. The plans that he made included a plan to propose to his girlfriend (now wife) on the Yacht the following week and for friends then to join them for a cruise. It would clearly have been a considerable setback if these plans had had to be aborted. That is not to say that Mr Hirtenstein would not have made the best of things if problems occurred, as in the event he did. But I have no doubt that, once his decision to buy was made, Mr Hirtenstein was set on acquiring the Yacht as quickly as possible and had no thought of going back on that decision unless some major unexpected problem arose.

What were Mr Hirtenstein’s instructions?

Against this background I turn to the question of what instructions Mr Hirtenstein gave to Hill Dickinson about seeking contractual protection in his two telephone conversations with Mr Lawson on 13 July 2010. Following these conversations it does not appear that Mr Hirtenstein and Mr Lawson spoke again until after the purchase had been completed: all their further communications were by email. Mr Lawson made no attendance note of the conversations, and there is a substantial conflict of evidence about what was said.

Mr Hirtenstein frankly accepted in cross-examination that he had no specific recollection of the conversations on 13 July 2010. He believed, however, that when they spoke he told Mr Lawson that he had been assured by Mr Cecil-Wright and Mr Candy that the Yacht was in perfect condition; that Mr Lawson suggested that he should try to obtain a personal guarantee from Mr Candy to reflect these assurances, since a warranty from the company which owned the Yacht was very likely to be worthless; that he (Mr Hirtenstein) agreed to this suggestion; that Mr Lawson asked what his attitude would be if Mr Candy would not give such a guarantee; and that Mr Hirtenstein said that in that case he would be extremely worried about the condition of the Yacht and would walk away from the deal.

In support of this account, the claimants relied on an email sent by Mr Hirtenstein to Hill Dickinson on 10 February 2011, some six months after the conversations but at a time when it was suggested that Mr Hirtenstein had a good recollection of what was said. The email was written in the context of discussing Mr Hirtenstein’s claim for breach of the warranty but before he had found out that there was no personal guarantee. In this email Mr Hirtenstein wrote:

“Btw, I just thought of something, you may dismiss it, but to me it really points to the validity of my claim. This deal was originally ‘as is, where is’, and it was you very intelligent lawyering asking me if I would be upset if I lost the deal over you asking for the candy + candy rep/warranty….

I said I wouldn’t lose any sleep and thought your idea was smart business, and if the candy’s really f[el]t comfortable that everything w[ith] the boat was in great order if they balked then I actually should worry.”

Mr Lawson’s account of the conversations on 13 July 2010 was very different. He agreed that Mr Hirtenstein had asked him if he could obtain some assurances regarding the condition of the Yacht, to back up information given by Mr Cecil-Wright and Mr Candy that a million euros had been spent on cosmetic upgrading and maintenance. According to Mr Lawson, he told Mr Hirtenstein that it might be possible to get assurances from the seller as to the cosmetic condition and maintenance of the Yacht if the sum stated had indeed been spent on it over the winter but that it would not be possible to get any warranty of the mechanical condition of the Yacht as Mr Hirtenstein was buying on an “as is, where is” basis. Mr Lawson said that he distinctly remembers telling Mr Hirtenstein that getting such a warranty when the Yacht was being offered “as is, where is” for such a favourable price would be “having his cake and eating it”. Mr Lawson also claimed to have told Mr Hirtenstein that there was no possibility of Mr Candy providing a personal guarantee as to the condition of the Yacht. According to Mr Lawson, the matter was left on the footing that he would try to get some assurances in relation to the cosmetic condition of the Yacht, but that it would not stop the transaction if he did not succeed.

For their part, Hill Dickinson relied as support for Mr Lawson’s recollection on an internal email which he sent to a colleague, Mr Bishop, on 8 June 2011 immediately after Mr Lawson had spoken to Mr Hirtenstein and explained that he had been mistaken in believing that the warranty of the Yacht’s condition was covered by Mr Candy’s personal guarantee. In this email Mr Lawson said:

“There were a couple of things he is exaggerating – that he would not have bought the yacht had he known that the PG didn’t extend to Add 2 clause 5, plus all of his financial losses, and he says that I raised the as is, where is issue – that isn’t true as he asked me where he was left if he took it without a survey and I told him. He asked whether I could protect him and I said I would see what I could do.”

An earlier email sent by Mr Lawson on 25 September 2010 to the then captain of the Yacht put a rather different gloss on how the warranty came to be obtained (at a time when Mr Lawson still thought that he had secured a personal guarantee covering the Yacht’s condition):

“I drafted the wide ranging warranties and representations in the sale agreement and ensured that they were backed by an unlimited PG from Christian Candy. … Mr H bought the yacht without a survey because CC and the brokers told him it was turnkey and immaculate. After a battle I forced CC to stand by his sales pitch by accepting the reps and warranties.”

Unsurprisingly, Mr Lawson is now embarrassed by this email, which he described in his evidence as an “unpleasant” email in which he was “showing off”.

It is clear that Mr Lawson, unlike Mr Hirtenstein, has thought long and hard about what was said in the conversations on 13 July 2010 and looked carefully through the contemporaneous documents. I do not consider, however, that this makes his memory more reliable. For reasons which I gave in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) at paras 15-23, I think it unsafe to suppose that, because Mr Lawson has a confident and honest recollection of what was said, his recollection is a reliable guide to the truth. Nor do I consider that much weight should be placed on statements made in emails sent several months after the relevant conversations took place, when claims were being pursued or contemplated relating to the Yacht’s condition as a result of the damage which subsequently occurred. The right approach, in my view, is to base my findings firmly on the contemporaneous documentary evidence and on independently established facts.

It is apparent from Mr Lawson’s email to Clark Ricketts timed at 17.24 on Wednesday 14 July 2010 and from his email to Mr Hirtenstein timed at 18.11 (quoted in paragraphs 37 and 39 above) that Mr Hirtenstein must have discussed with Mr Lawson the assurance given by Mr Cecil-Wright about the excellent condition of the Yacht and the money spent on maintenance and Mr Candy’s assurance that “basically you walk on next week, and she is good to go, either for charter or for your own use”. Those representations were reflected in Mr Lawson’s draft warranty and provided him with his negotiating strategy. Essentially, his negotiating line was: since you have said these things about the Yacht’s condition which Mr Hirtenstein is relying on, you must be prepared to give them contractual force – especially when he is taking the Yacht on trust without even an inspection, let alone a survey or sea trial.

I reject the suggestion that Mr Hirtenstein specifically instructed Mr Lawson to request a personal guarantee from Mr Candy of the Yacht’s condition, let alone that he gave instructions that this was a ‘deal-breaker’. In the first place, this would have represented a major shift in attitude by Mr Hirtenstein, since he had told Mr Candy the day before that his word was “as good as a signed contract” and to “consider this deal done” on the basis that he was taking the Yacht “as is, where is”. It is not impossible that Mr Hirtenstein could have changed his mind, but nothing had occurred in the meantime which might have caused him to do so. Even more significantly, the communications sent after Mr Hirtenstein’s telephone conversations with Mr Lawson and Mr Hirtenstein’s subsequent conduct are inconsistent with him having given such instructions. In particular:

The claimants rely heavily on the email (quoted at paragraph 40 above) which Mr Hirtenstein had sent at 18.16 after Mr Lawson had informed him of the negotiations over the wording of paragraph 5 in Addendum 2 of the Sale Agreement, in which Mr Hirtenstein said:

“Simply tell them I am not negotiable on this point … no way I pay this much without these assurances so let them know.”

This email is relied on as evidence that Mr Hirtenstein regarded obtaining a warranty of the kind that Mr Lawson was seeking, backed by a personal guarantee from Mr Candy, as a matter which was not negotiable. It was argued by the claimants that, even if Mr Hirtenstein had not given such an instruction in his telephone conversations with Mr Lawson, this email was such an instruction.

I cannot accept this contention for the following reasons:

I think it unlikely that a distinction was drawn in the discussions on 13 July 2010, as Mr Lawson claimed, between the cosmetic condition and the mechanical condition of the Yacht. No such distinction is drawn in any of the contemporaneous documents.

I also do not accept Mr Lawson’s evidence that he told Mr Hirtenstein that it would be impossible to obtain a personal guarantee from Mr Candy which related to the condition of the Yacht. My main reasons are as follows:

On the basis of the evidence as a whole, I think it probable that the discussion between Mr Hirtenstein and Mr Lawson about contractual protection in their telephone conversations in which Mr Hirtenstein’s instructions were given was along the following lines. Mr Lawson sought confirmation that Mr Hirtenstein understood what was meant by purchasing the Yacht “as is, where is”. Mr Hirtenstein confirmed that he did and that he was happy to proceed on this basis but said that he wanted some assurance that the Yacht was in good working order and ready for immediate use, as Mr Cecil-Wright and Mr Candy had told him that it was. In this context he must have discussed the representations which Mr Cecil-Wright and Mr Candy had made. Mr Lawson saw this as something he could use as a basis for seeking some form of warranty of the Yacht’s condition.

I would expect that Mr Lawson explained to Mr Hirtenstein that the standard contractual documents consist of a sale agreement with the seller backed by a personal guarantee from its beneficial owner; and also that the standard documents do not contain any warranty of the Yacht’s condition. He also probably indicated that, in view of the “as is” basis of the deal, Mr Candy might well not agree to give any warranty of the Yacht’s condition. (It is possible that in this context Mr Lawson might have used the expression “having your cake and eating it”, although I make no specific finding that he did.) I think it likely that Mr Lawson asked Mr Hirtenstein whether he was content to leave it to Mr Lawson to try to get the best contractual protection that he could, and that Mr Hirtenstein confirmed that he was. I base this last finding principally on how Mr Lawson acted after he had spoken to Mr Hirtenstein. It is also consistent with the terms of the retainer letter (quoted in paragraph 35 above) sent the next day.

Negligence

Hill Dickinson have admitted that they were negligent in advising Mr Hirtenstein at 11.35 on 16 July 2010 that they had obtained a personal guarantee from Mr Candy which covered the condition of the Yacht. As discussed earlier, Mr Lawson gave this advice because he mistakenly and negligently believed that the contractual documents as drafted by him had the effect that the warranty of the Yacht’s condition included in the MoA was covered by Mr Candy’s personal guarantee. Hill Dickinson deny, however, that they were negligent in any other respect.

No fewer than 18 particulars of negligence are alleged by the claimants. Many of these say the same things in different ways. Essentially, they boil down to allegations that Mr Lawson:

I find it difficult to envisage that an astute solicitor, as Mr Lawson clearly is, who had been instructed to do his best to obtain some form of contractual protection regarding the Yacht’s condition would have sought that protection only from Candyscape Ltd and not also from Mr Candy. The reason is that Candyscape Ltd was, as Mr Lawson knew, a special purpose company. Mr Lawson clearly appreciated that its only asset was likely to be the Yacht. At the very least, Mr Lawson had no reason to think that the company owned any other assets and made no attempt to find out. A warranty from the company alone, therefore, which was not backed by Mr Candy’s personal guarantee or some other security, was unlikely to be of any practical value (as subsequent events indeed confirmed). Even if Mr Lawson thought it improbable that Mr Candy would agree to give such a personal guarantee (or any other contractual protection of any real value), he could not know if he did not ask.

With some hesitation, however, when regard is had to all the circumstances, I do not feel able to conclude that any reasonably competent and careful solicitor seeking a contractual warranty of the Yacht’s condition would have been bound to request that it should be backed by a personal guarantee such that the failure to make such a request was itself negligent. The relevant circumstances include:

In these circumstances I consider that a reasonably competent and careful solicitor in Mr Lawson’s position could, without negligence, have taken the view that there was no realistic prospect of getting a personal guarantee of the Yacht’s condition from Mr Candy and that to seek one would simply introduce a risk of disrupting the deal. However, I also consider that any reasonably competent and careful solicitor who took that view and decided to seek a warranty of the Yacht’s condition from the selling company alone without any personal guarantee from its beneficial owner or other security, would have advised his client that this was what he was doing before exchanging contracts. I am sure that this is what Mr Lawson would have done if he had decided to seek a warranty from Candyscape Ltd which was not supported by Mr Candy’s guarantee.

I do not consider that Hill Dickinson were negligent in any other respect apart from those identified above.

Causation

The next question is whether the negligence of Hill Dickinson caused Mr Hirtenstein to purchase the Yacht without a personal guarantee from Mr Candy which covered the Yacht’s condition. In order to answer this question, it is necessary to make judgments about what each of Mr Lawson, Mr Candy and Mr Hirtenstein would have done if Mr Lawson had not been negligent in the respects that I have found that he was.

When a court has to decide what people would have done in the absence of professional negligence, the standard of proof differs according to whose actions are under consideration. Where the question is what a party to the proceedings would have done, the matter is decided on the balance of probability. Thus, if the court considers that it is more probable than not that the claimant would have acted in a particular way, the court will proceed on the basis that the claimant would indeed have acted in that way; while if that burden is not met, the court will proceed on the basis that the claimant would not have done so. The same all-or-nothing approach applies where the question is what the defendant would have done. By contrast, where the question is what a third party would have done, to the extent that there is a substantial doubt about the matter the approach of the court, as established by cases such as Allied Maples v Simmons & Simmons [1995] 1 WLR 1602 and many others, is to assess the chance that the third party would have acted in the relevant way and to award damages which reflect that chance.

Applying these standards, I set out my findings about what Mr Lawson, Mr Candy and Mr Hirtenstein would have done if Hill Dickinson had acted without negligence.

The first question is what Mr Lawson would have done if he had not mistakenly and negligently believed that the condition warranty which he drafted, if agreed, would be covered by Mr Candy’s personal guarantee.

In my view, the likelihood is that, if Mr Lawson had not mistakenly thought that he was seeking a guarantee from Mr Candy of the condition warranty indirectly, he would have sought such a guarantee directly. My main reasons for making this finding are points already mentioned. In particular:

If Mr Lawson had not made the mistake that he did about the effect of his draft wording, I think it most likely that he would have proposed a draft amendment to Mr Candy’s guarantee which expressly stated that the vessel complied with the warranty given in clause 15 of the MoA.

In view of this finding, it does not matter that I have found that Mr Lawson could without negligence have decided not to request a guarantee covering the Yacht’s condition from Mr Candy. The correct legal approach in a situation of this kind was clearly analysed by Hobhouse LJ in Joyce v Merton, Sutton and Wandsworth Health Authority [1996] 7 Med LR 1, 20, in a passage approved by the House of Lords in Bolitho v City & Hackney Health Authority [1998] AC 231 at 240:

“Thus a plaintiff can discharge the burden of proof on causation by satisfying the court either that the relevant person would in fact have taken the requisite action (although she would not have been at fault if she had not) or that the proper discharge of the relevant person's duty towards the plaintiff required that she take that action. The former alternative calls for no explanation since it is simply the factual proof of the causative effect of the original fault. The latter is slightly more sophisticated: it involves the factual situation that the original fault did not itself cause the injury but that this was because there would have been some further fault on the part of the defendants; the plaintiff proves his case by proving that his injuries would have been avoided if proper care had continued to be taken.”

In this case I am satisfied that Hill Dickinson would in fact have taken the requisite action (requesting a personal guarantee covering the Yacht’s condition from Mr Candy) even though they would not have been negligent if they had not. I must therefore proceed to assess what would have happened in that event.

The next question is therefore whether, if Mr Lawson had sought a personal guarantee which covered the warranty of the Yacht’s condition (as he intended to do), there is a real or substantial chance that Mr Candy would have agreed to give one. Although the relevant standard of proof is a relatively low one, being much less than the balance of probability, I do not consider that the existence of such a chance has been established. My main reasons are as follows:

The suggestion that Mr Candy might have agreed to give a personal guarantee of the Yacht’s condition was in large part based on a theory suggested by Mr Hirtenstein that Mr Candy had a desperate and urgent need for cash and that this could explain why he was in such a hurry to sell the Yacht at a knock down price. However, there is no evidence at all to support this theory, other than inference from the terms of the sale itself. Those terms are in my view sufficiently explained by the facts: (i) that Mr Candy had been trying unsuccessfully to sell the Yacht for some time on a declining market; (ii) that he was no longer using the Yacht which was nevertheless continuing to incur substantial running costs; (Footnote: ³) (iii) that the longer the Yacht was unused the less saleable it was likely to become; (iv) that Mr Candy had recently lost a buyer who had dropped out after inspecting the Yacht; (v) that Mr Cecil-Wright and Mr Candy knew that Mr Hirtenstein was a potential buyer, at least if offered a sufficient inducement; and (vi) that a quick sale, without a survey or sea trial, avoided the risk that Mr Hirtenstein might discover a problem or for some other reason lose enthusiasm for the purchase. Although I am sceptical that the result of the litigation in which Mr Candy had been involved had anything to do with his decision, I see no reason to doubt the explanation given by Mr Cecil-Wright to Mr Hirtenstein that Mr Candy “just wants out” (see paragraph 22 above). That attitude explains Mr Candy’s decision to offer Mr Hirtenstein a good price, but only on the basis that he had no ongoing liability relating to the Yacht.

The redemption statement for the mortgages on the Yacht provided to Hill Dickinson by Clark Ricketts at the time of completion showed an amount payable to the bank to discharge the mortgages of some €5.5m. It appears, therefore, that Mr Candy did not receive any cash from the sale and in fact had to inject some money into Candyscape Ltd to enable the mortgages on the Yacht to be discharged. This is a further reason why I can give no weight to the supposition that the sale was motivated by an urgent need for cash.

It is not beyond the realm of possibility that Mr Candy might have agreed to give some form of contractual undertaking regarding the Yacht’s condition which had some value, if he had believed that it was necessary to do so in order not to lose the sale. However, whether this is the case and, if so, what form such an undertaking might have taken, are in my view matters of pure speculation. The claimants’ case is in any event founded on the notion that Mr Candy would have given a personal guarantee backing the condition warranty drafted by Mr Lawson. I find that there is no realistic chance capable of supporting an award of damages that Mr Candy would have given such a guarantee.

The last question relevant to causation is whether, if Mr Candy had been asked and had declined to give a personal guarantee covering Hill Dickinson’s proposed warranty of the Yacht’s condition, Mr Hirtenstein would still have proceeded with the purchase. I am satisfied that he would.

My main reasons for this conclusion are the following:

I think it clear from the evidence that Mr Hirtenstein’s belief that he would not have proceeded without a personal guarantee from Mr Candy of the Yacht’s condition is one that has been formed in hindsight and does not represent his attitude at the time. A major part of Mr Hirtenstein’s thinking now is that, if Mr Candy had not been prepared to back his statements that the Yacht was “ready to go” with a contractual undertaking, he would have been extremely worried, and this would have caused him to walk away from the deal. All the evidence from Mr Candy’s emails, however, suggests to me that Mr Candy would have presented his refusal to give a personal guarantee in a way which disarmed any such anxiety on Mr Hirtenstein’s part. So too would Mr Cecil-Wright, a broker in whom (whether it was justified or not) Mr Hirtenstein had reposed a good deal of trust. I think it likely that Mr Candy would have provided some form of comfort to Mr Hirtenstein. It is not necessary or sensible to speculate about exactly what form that comfort would have taken. I am confident, however, that it would not have involved Mr Candy giving a legally binding personal guarantee which covered the condition of the Yacht.

I therefore conclude that the negligence of Hill Dickinson did not cause the claimants to purchase the Yacht without a personal guarantee from Mr Candy of the Yacht’s condition. It follows that the claimants have suffered no loss for which they are entitled to recover damages.

Quantum of a claim under a guarantee

In view of my conclusion that the negligence of Hill Dickinson had no relevant causative effect, issues relating to the quantum of damages do not arise. In case I am wrong on the question of causation, however, I will record my findings on the remaining issues. I will first of all assess the sum which the claimants would have recovered if they had received a personal guarantee from Mr Candy to back the warranty in the sale contract as to the Yacht’s condition.

There are numerous cases involving solicitors whose negligence has deprived the claimant of the opportunity to pursue a claim against a third party which confirm that the correct approach is to assess damages by reference to the prospects that the claim would have had a successful outcome. A case in which the applicable principles were considered in careful detail is Harrison v Bloom Camillin [2001] PNLR 195. The following points emerge from the judgment of Neuberger J in that case:

A further point established by the case law is that, in considering what would have happened if the opportunity of pursuing a claim had not been lost as a result of the defendant’s negligence, the principle in Armory v Delamirie (1722) 1 Stra 505 applies. In essence, this requires the Court in assessing the prospects of success to tend towards a generous assessment by giving the claimant the benefit of any relevant doubt, given that it is the defendant’s negligence which has meant that the actual outcome of the claim cannot be known: see e.g. Mount v Barker Austin [1998] PNLR 493, 511; Sharif v Garrett & Co [2001] EWCA Civ 1269; [2002] 1 WLR 3118; Browning v Messrs Brachers [2005] EWCA Civ 753; [2005] PNLR 44 at paras 204-212; Phillips & Co v Whatley [2007] UKPC 28; [2007] PNLR 27 at para 45.

In the present case the issues relating to the condition of the Yacht and the cost of repairs have been addressed in evidence, including expert evidence, and have been argued, as if this was the trial of those issues rather than just an inquiry into the likely outcome of such a trial. Indeed, for the purposes of the second way in which the claimants case is put – based on the hypothesis that the negligence of Hill Dickinson caused Mr Hirtenstein to buy the Yacht – this is the trial of those issues. Furthermore, I see no reason to think that there were any significant or relevant differences between the evidence adduced in these proceedings and the evidence which would have been adduced in proceedings against Candyscape Ltd and Mr Candy. Evidence was being prepared for the purpose of such proceedings until Hill Dickinson’s error was discovered in June 2011. That evidence remained relevant thereafter; all that happened was that the target of the claim changed. While the discovery of Hill Dickinson’s negligence introduced some delay, I see no reason to think that the additional lapse of time has affected the quality of the evidence. Although there are deficiencies in the claimants’ evidence, there is nothing to suggest that they would not have existed if the claim against Candyscape Ltd and/or Mr Candy had been pursued to a trial; and some of the deficiencies undoubtedly already existed – such as the fact that no survey of the Yacht’s condition was carried out until almost three months after the sale and after the Yacht had been transported to Florida.

Accordingly, I think it right in this case to examine the prospects of success in detail, making relevant findings of fact and deciding the relevant questions of law. In assessing the claimants’ likely recovery, however, it is still necessary to take account of the likelihood that a settlement would have been reached and of the risks and irrecoverable costs involved if the claim had gone to trial. I will consider first whether, and if so in what respects, there was a breach of the warranty of the Yacht’s condition incorporated in the sale contract; second, the measure of damages in a claim for breach of that warranty; and third, the amount of money which the claimants would have recovered if the warranty had been backed by a personal guarantee from Mr Candy.

The engineering experts agreed that the probable cause of the failure of the starboard engine shortly after the Yacht was delivered to the claimants was leakage of fuel oil into the lubricating oil through faulty seals in the fuel injection pump. Analysis carried out on 22 July 2010 found a 10% dilution of the lubricating oil with fuel oil in a sample taken from the starboard engine together with the presence of particles indicating severe wear. A similar 10% dilution with fuel oil was found in the lubricating oil of the port engine, although in that sample evidence of only slight wear was found. A dilution of anything over 1% is regarded as excessive.

The experts disagreed over whether it is likely that leakage of fuel oil into the lubricating oil had already occurred before the engines were started on 16 July 2010 so that such contamination would have been detected if oil sampling and analysis had been carried out immediately before the Yacht was sold. If it were relevant to decide this question, I would prefer the view of the claimants’ expert, Mr Smith, that such leakage had already occurred, as it seems inherently unlikely that the seals in the fuel injection pumps of both engines failed simultaneously in the very short period before the breakdown of the starboard engine occurred following the completion of the sale. I do not think the point matters, however, since it cannot be said that a fuel pump which is on the verge of failure because the seals are worn is in good mechanical condition.

The maintenance records for the starboard engine show that the fuel pump had last been overhauled and the seals replaced in February 2002 – more than eight years before the sale. Since February 2002, the starboard engine had been operated for only around 2,500 hours, an average of just over 300 operating hours a year. The manual issued by the engine manufacturer, Deutz, describes two maintenance regimes, one for “continuously operated engines” and the other for “engines operated in standby mode for up to 300 operating hours a year”. In the first case the recommendation is to check the fuel injection pump after 5000 operating hours and in the second case the maintenance time is specified as six years. Both experts agreed that the implication of the manual is that, however little the engine is being used, the fuel pump should be serviced at least every six years – and sooner if the engine reaches 5000 operating hours. It is clear that by July 2010 the fuel pump was well overdue for a service.

Maintenance records for the port engine were missing for the period after February 2006. There is no reason to suppose that it was any better maintained. However, the port engine was newer than the starboard engine and had fewer running hours, having been replaced during a refit of the Yacht in 1988/99. The port engine was examined by metallurgical consultants, Applied Metals Science Inc, who prepared a report dated 4 December 2010. The report states that the lower bearings appeared to be almost new with no significant deterioration but the upper bearings were worn out. The experts agreed that this makes no sense because the lower bearings have the heaviest load and will almost inevitably show signs of wear before the upper bearings. It is likely that the report stated the findings the wrong way round, possibly because the engine was turned upside down at the time of the inspection. The experts agreed that replacement of the bottom end bearings is a relatively straightforward task though they also agreed that a full inspection of all the main engine parts would have been necessary, which might have revealed a need for further work.

I conclude that there were breaches of warranty in that neither engine was in good mechanical condition at the time of sale and that, by reason of the defective condition of the engines, the Yacht was also not ready for immediate private or commercial use.

In addition to the defects in the engines, the claimants contend that there were other breaches of the warranty regarding the Yacht’s condition. For the purpose of the intended claim against Candyscape Ltd (and, if necessary, Mr Candy) Hill Dickinson instructed a marine surveyor, Mr Robert Connell of Patton Marine Inc, to prepare an expert report. Mr Connell first inspected the Yacht just after she arrived in Florida on 6 and 7 October 2010. His preliminary report dated 11 January 2011, which had been through several drafts, was sent by Hill Dickinson to Candyscape Ltd on 26 January 2011 in support of the intended claim. The report included an estimated cost of US$420,000 for rebuilding the starboard engine and US$280,000 for a “top end service” of the port engine. The first of these figures must have been based on the quotation from Motor Services Hugo Stamp referred to below; the source of the second figure has not been identified.

Mr Connell also noted a number of other defects, of which the main items were:

No satisfactory evidence has been adduced by the claimants to prove that these defects existed at the time of completion of the purchase of the Yacht. As mentioned earlier, no survey of the Yacht’s condition was carried out until some three months after the purchase and after the Yacht had been transported across the Atlantic. Moreover, none of these matters was identified in the initial drafts of Mr Connell’s report. It is notable that in an email sent to Hill Dickinson on 7 October 2010, immediately after his inspection of the Yacht, Mr Connell had reported that the generators “have been maintained and were in good working order at the time of inspection”. The defendant’s expert, Mr Chettleborough, examined the maintenance records for the air conditioning system which indicated that the system had been properly maintained. Nor is it clear whether (apart from replacement of the generators) any of the items of work mentioned in Mr Connell’s report was actually carried out and, if so, at what cost.

I conclude that, apart from the defects in the engines, the claimants have not proved that there was any other breach of the condition warranty.

The claimants’ primary case is that damages for breach of warranty should be measured by comparing the value of the Yacht in July 2010 in its damaged condition after the starboard engine had failed with its value at that time had its condition been as warranted. In the alternative to the claim made on this difference in value basis, the claimants contend that damages should be based on the cost of repairing the Yacht. In each case the claimants also argue that they would have been entitled to damages for loss of use of the Yacht or wasted expenditure during the period of repairs.

Section 53 of the Sale of Goods Act 1979 provides:

“(2)

The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3)

In the case of breach of warranty of quality such loss is prima face the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.”

As is apparent from the wording of sub-section (3) and its relation to sub-section (2), the difference in value rule stated in sub-section (3) is not an abstract and freestanding measure of damages, to be applied for its own sake; it is simply a means of giving effect to the basic measure of damages stated in sub-section (2) and must give way to other methods where it does not effectively serve that purpose.

Unlike sections 50(3) and 51(3) of the Act, which deal respectively with the measure of damages for non-acceptance by the buyer and non-delivery by the seller, section 53(3) does not expressly apply only where there is “an available market for the goods”. However, the prima facie rule in sub-section (3) rests on the same assumption that there is a market in which substitute goods are immediately available to the injured party: see e.g. Slater v Hoyle & Smith Ltd [1920] 2 KB 11, 22. For example, there are well established markets in commodities such as gasoil, soya beans, coffee etc. Where a seller of such a commodity delivers goods of defective quality, the buyer can go immediately into the market and purchase goods which are equivalent to those which the seller ought to have delivered.

This is an aspect of mitigation: where there is an available market, the claimant is reasonably expected to resort to it in response to a breach. As with any ‘failure to mitigate’, the essential point is that the decision whether or not to resort to the market is a voluntary choice made by the claimant which breaks the chain of causation from the defendant’s breach: see e.g. Koch Marine Inc v d’Amica Societa di Navigazione Arl (The Elena d’Amico) [1980] 1 Lloyd’s Rep 75, 88; Blue Circle Industries Plc v Ministry of Defence [1999] Ch 289, 305-306, 316, 321-322; and see Andrew Dyson and Adam Kramer, “There is No ‘Breach Date Rule’: Mitigation, Difference in Value and Date of Assessment” (2014) 130 LQR 259, 264-265. It is therefore reasonable to assess the loss directly and naturally resulting, in the ordinary course of events, from a breach of warranty by the seller as if the buyer had immediately purchased substitute goods. If the buyer chooses not to do so, the consequences of that choice, for better or worse, will be for the buyer’s account. Similarly, it is generally reasonable to expect a buyer to whom defective goods are delivered to dispose of the goods as soon as possible or, if the buyer chooses not to do so, to assess his loss as if he had done so, treating any subsequent further diminution (or gain) in value as a consequence of a choice to keep the goods.

It is clear that these assumptions, which underpin the prima facie difference in value measure of damages in an action for breach of warranty, have no application in the present case. First of all, there is no market of the relevant kind for second hand luxury yachts. Such yachts are not fungibles like commodities, shares in listed companies or even second hand cars. As the evidence of ‘comparables’ relied on by the valuation experts amply demonstrated, some yachts which are very broadly similar in terms of age, length, tonnage, manufacturer etc may be on the market for sale at the same time, but no two yachts are alike. Each will differ in many different ways from every other yacht on the market. There is also a significant and legitimate element of subjective preference involved in choosing a yacht to buy. In these circumstances it would be unreasonable and completely unrealistic to assess damages on the assumption that the buyer of a yacht which turns out not to be in the condition warranted could go into the market and buy a substitute, the market price of which can be used to measure the value which the yacht actually purchased would have had if the warranty had been fulfilled.

It would be equally unreasonable to assess damages on the assumption that the defective yacht will immediately be sold. The reasons for this are apparent from the ‘residual’ valuation carried out by the claimants’ expert valuer, Mr Gilmour, of the amount likely to have been realised if the claimants had sold the Yacht in its actual state. It was Mr Gilmour’s evidence that the only likely purchaser would have been a professional buyer looking to repair the Yacht and make a profit on a re-sale. According to Mr Gilmour, such a buyer would factor into the price offered: the full estimated cost of repairs; a contingency for cost overruns; project management costs; legal costs; the costs of financing the project; broker’s commission on a re-sale; and a profit or risk factor of 25%. In the final version of his calculations, Mr Gilmour estimated that the discount from the value of the Yacht in warranted condition required by such a purchaser would have been of the order of €3m. It is not surprising in these circumstances that Mr Gilmour agreed that a reasonable owner would probably have repaired the Yacht before selling it.

Moreover, even at such a heavily discounted price, it would not be reasonable to assume an immediate sale. The experts agreed that, if the vessel was marketed correctly, priced to sell at a suitable discount and offered as a bargain, they would expect it to sell within 18 months.

It is not necessary to decide whether it could have been said that Mr Hirtenstein had failed to take reasonable steps to mitigate his loss if he had in fact decided to extricate himself by selling the Yacht in its damaged condition. The fact is that he did not do so. In these circumstances it would be unreasonable to assess damages as if he had sold the Yacht.

For these reasons, I would regard it as clearly inappropriate to seek to measure the loss resulting from a breach of warranty of the Yacht’s condition on a difference in value basis. In my view, the only fair measure of damages to apply is the reasonable cost of repairing the Yacht to restore it to its warranted condition.

As a result of the breach of warranty, the starboard engine suffered major damage and it is common ground that it needed to be completely rebuilt or replaced. As mentioned earlier, the Amico Yard in Genoa provided an estimate dated 29 July 2010 for replacing the engine with a reconditioned Deutz engine at a cost of around €360,000 (equivalent to about US$470,000). Rybovich of Florida also provided a quotation for this work dated 6 August 2010 in a sum of US$430,124. Another option considered was to rebuild the engine in the engine room. Motor Services Hugo Stamp (“MSHS”), who quoted for doing this, indicated in an email dated 20 October 2010 that the success rate for machining the engine block was 50-75% which would cost US$20,000 to US$25,000 in the first instance; if this was successful, they could go on to rebuild the entire engine. Their estimate dated 4 November 2010 for the full rebuilding cost was US$414,738. It appears from the schedules of costs prepared to support the claim made under the Yacht’s hull and machinery insurance that MSHS later re-assessed the risk that machining the engine block might not be successful at only 5%.

Two options were considered by Mr Hirtenstein – which were set out in an email to him from the captain of the Yacht dated 29 October 2010. The first was to rebuild the starboard engine in place and to carry on inspecting the port engine to assess any damage. The second option was to replace both engines with brand new engines (referred to as a “full repower”). Quotations were obtained from Ring Power for new Caterpillar engines which indicated that the price would be of the order or US$845,000. The actual price later agreed was US$647,680.

Mr Robsham, a marine surveyor at Patton Marine Inc, was instructed to assess the condition of the Yacht and advise Mr Hirtenstein as to the work which was necessary or desirable to do. His view (and that of colleagues at Patton Marine) set out in an email to the captain of the Yacht on 10 November 2010 was that a repower would involve a huge extra expense for not many advantages and was therefore not necessarily the best use of time and money for the owner. In particular, he advised that: (1) the Yacht’s value was only likely to increase by some fraction of the cost of the work, and also (2) that a repower would be “complex and drawn out, with far greater time required and expense incurred than one can readily estimate, regardless of the best laid plans.”

Mr Hirtenstein nevertheless decided to opt for the “repower” and to replace both main engines with brand new Caterpillar engines, for which he also bought a five year warranty. The claimants have argued that this was a reasonable and sensible thing to do and that the costs incurred would therefore have been recoverable in a claim for breach of warranty.

This argument, and indeed the claimants’ whole approach to this part of the case, rested in my view on a confusion about what the principle of mitigation involves. The principle is often expressed by saying that a claimant has a duty to take reasonable steps to mitigate his loss. However, this formulation has the potential to mislead in so far as it may suggest that a claimant who acts in a way which is reasonable in terms of his own preferences and priorities cannot be in breach of this ‘duty’. In truth, there is no duty to mitigate in that a claimant who does not mitigate his loss does nothing wrong: see e.g. The Solholt [1983] 1 Lloyd’s Rep 605, 608. The true principle is that, where there is more than one option reasonably available to the claimant in responding to the consequences of the defendant’s breach of duty, the claimant can only recover as damages the cost of the less (or least) expensive option. If the claimant in fact chooses a more expensive option, this does not mean that he is acting unreasonably; but the additional cost is regarded as a consequence of the claimant’s choice and not of the defendant’s wrong. So, for example, in Darbishire v Warran [1963] 1 WLR 1067 the plaintiff had his damaged motor car repaired at a cost which exceeded its market value. The Court of Appeal held that, while the decision to repair the car may well have been reasonable so far as the plaintiff was concerned, he had nonetheless failed to mitigate his loss because there was a cheaper option reasonably available of writing off and replacing the car. The damages were therefore limited to the market value of the car in undamaged condition. Harman LJ said (at p.1072):

“The judge here held that the plaintiff was reasonable in having the car repaired notwithstanding that the cost was more than twice the value. It may well be that the plaintiff, so far as he himself was concerned, did act reasonably and that what he got was of more value to him than the damages represented by the value of the car. ... In my opinion the judge asked himself the wrong question. The true question was whether the plaintiff acted reasonably as between himself and the defendant and in view of his duty to mitigate the damages.”

Acting reasonably ‘as between the claimant and the defendant’ means choosing the cheapest reasonable option.

I accept that it was a reasonable choice, in circumstances where the engines were old and one of them needed to be completely rebuilt or replaced, for Mr Hirtenstein to decide instead to incur the additional expense of installing new engines. However, there were other choices which would also have been reasonable – namely, having the starboard engine rebuilt or replaced with a reconditioned engine and any necessary repairs done to the port engine. It is also clear that installing new engines went beyond what was necessary in order to restore the Yacht to its warranted condition and put the Yacht into a significantly better condition. A claimant may be entitled to recover the costs of replacing old with new if there is no reasonable alternative: see Harbutt’s ‘Plasticine’ Ltd v Wayne Tank and Pump Co. Ltd [1970] 1 QB 477 at 468, 472-3, 476; Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397; Lagden v O’Conner [2004] 1 AC 1067, para 34. In this case, however, there was a reasonable alternative, and Mr Hirtenstein’s decision to purchase new engines was a matter of choice.

I therefore think it clear that, insofar as the costs incurred in replacing the Yacht’s engines exceeded the reasonable cost of rebuilding or replacing the starboard engine together with the cost of any work needed on the port engine, those costs would not have been recoverable.

It is also clear that Mr Hirtenstein took the opportunity while the Yacht was in dry dock to carry out a major refit. Again, there was nothing unreasonable in deciding to do this. But no credible evidence was put forward to show that this work was needed in order to repair breaches of the condition warranty. It is an unattractive feature of the way the claim was presented that the claimants and their expert Mr Smith attempted to characterise much of this work as repairs and thereby recover the costs from the defendant.

The claimants’ engineering expert, Mr Smith, assessed the cost of restoring the Yacht to its warranted condition in the sum of US$2,381,760. Mr Smith was provided with a spreadsheet listing all expenditure on the Yacht in the period July 2010 to April 2012, totalling US$2,850,118. The person (not identified by Mr Smith) who prepared the spreadsheet had already allocated the expenditure in columns between repairs, routine maintenance, upgrades and a category headed “questionable”. Mr Smith said that his instructions were to analyse the costs and to allocate them, including those marked as “questionable”, to the correct category. (Footnote: ⁴)

None of the “questionable” items was classified by Mr Smith as an upgrade; nor did he classify as an upgrade any item which had been provisionally categorised as a repair or as routine maintenance. However, it is only necessary to read through the schedule of purported repair costs appended to Mr Smith’s report for it to be obvious that they include numerous items such as attorney’s fees (which Mr Smith was completely unable to explain) and a vast array of fittings and accoutrements, computer equipment and office supplies etc which are palpably unjustifiable. As these items evidently include a complete refit of the galley, it may truly be said, as Mr Tozzi, acting for the defendant, observed, that the claim includes the kitchen sink.

The careless way in which Mr Smith approached his task can be gauged by the fact that approximately three pages of items which appeared in Mr Smith’s schedule of upgrades also appeared in his schedule of repairs. When asked about this, Mr Smith said that his error was to have included the sums in the schedule of upgrades. The sums in question included items such as guest bedding (US$13,549), main salon furniture (US$30,124), napkins and placement settings (US$17,174) and wine glasses (US$792) – to take just a few examples. Mr Smith’s explanation of why he considered that these and very many other sums which appeared, to say the least, questionable should be classified as repairs rather than upgrades was that he had assumed from the fact that they were purchased that it must have been necessary to purchase them in order to bring the Yacht up to the warranted standard, and not simply a choice of the owner to do so. Mr Smith agreed that he was therefore, in effect, assuming the answer to the question that he had been asked.

Another unsatisfactory feature of Mr Smith’s evidence was that he attached to his supplemental report an appendix itemising expenditure totalling US$734,161 headed “costs for repairs to restore Il Sole to warranty standard (2)” which he was completely unable to explain. The appendix was not mentioned anywhere in the body of the report and Mr Smith had a “suspicion” that it might have been included in error.

At the end of Mr Smith’s evidence, I offered him the opportunity to provide an explanation to the court before the end of the trial of how an appendix had come to be included as part of his report of which he claimed to have no knowledge. Mr Smith did not take up that opportunity, and I can therefore only infer that there is no explanation which exonerates Mr Smith of incompetence. On his showing in this case I do not consider that he is a fit person to act as an expert witness.

In conclusion, I can attach no credence at all to the figures put forward by the claimants and rubber-stamped by Mr Smith for the alleged cost of repairs.

As mentioned earlier, a claim was made under the Yacht’s hull and machinery insurance policy which was settled in June 2011. The claim submissions prepared by the claimants for the purposes of this claim in my view provide a good guide to the reasonable cost of repairing the damage to the engines. It is notable that, although the notes accompanying the final version of the claim submission mentioned that “the Insured has ordered replacement engines rather than undertake the risk of rebuilding the engines”, the claimants did not attempt to claim the cost of replacing the engines from insurers. Instead, the claim was based on the MSHS quote for rebuilding the starboard engine dated 4 November 2010, while noting that this was an estimate only and that the Yacht’s managers believed it to be “significantly light”.

The final claim submission included docking charges for a period of six months from 1 October 2010 until 30 April 2011 on the basis that during this period the damage was being investigated plus docking charges for a further 120 days as the period estimated for rebuilding the starboard engine. I cannot accept that six months is a reasonable period for investigation. I would consider six months to be a fair period to allow in total for both investigation and repair. This may be compared with the opinion of Mr Chettleborough that rebuilding the engine would take 3-4 months and the agreement of both experts that the time taken to replace the starboard engine with a reconditioned Deutz engine would have been 4-6 months.

The total costs claimed in the final claim submission to insurers amounted to US$748,118. The submission also included a figure of US$808,295 as a rough estimate of how much the same work would have cost to carry out in Europe. This was included to show that the insurers would be benefitting from cheaper costs in Florida compared to Europe, whilst stating that “in the spirit of compromise” the claimants were willing to forgo a claim for the costs of transporting the Yacht to Florida in the sum of US$177,000.

The amount claimed included US$49,000 for “lost charter revenue” and a fee of US$109,421 calculated as 30% of the rebuilding costs on the footing that this fee would be payable to the Bradford Marine shipyard where the work would be done. However, an email from the brokers to Mr Hirtenstein dated 31 May 2011 reported that Bradford Marine had agreed not to charge a percentage mark-up to the engine repair work. In addition, in an email sent to Mr Hirtenstein and Hill Dickinson on 2 June 2011 the Yacht’s manager, Mr Connor, advised:

“I’m pretty close to disclosing to underwriters that we are cutting a hole in the hull to replace the engines … I would like the insurance claim to be settled before I do as once I do they will be able to see that we are completing repairs in a different facility than the one that priced the insurance claim numbers. For example a large amount of the claim was based upon dockage at Bradfords. I’ve since moved the yacht to a space that is about half the price of what Bradfords were charging.”

It is therefore apparent that the claim submission presented to underwriters included sums which the claimants knew would in fact not be incurred.

I will consider the claim for loss of use separately, and the figure of US$49,000 for lost charter revenue must therefore be removed from the estimated cost of repairs. The balance of US$700,000 includes some dockage charges and the Bradford Marine fee of US$109,421 which would not in fact have been payable. On the other hand, it is reasonable to allow an amount for contingencies. Those contingencies included the risk that the cost of rebuilding the starboard engine would have exceeded the amount estimated by MSHS, the risk (put at 5%) that after machining the engine block could not be re-used with a result that the engine would have had to be replaced with a re-conditioned Deutz engine at significantly greater expense, and the risk that the port engine might on further investigation have turned out to require significant repairs. When these contingencies are factored in, I consider that US$750,000 is a reasonable estimate for the total cost of repairs. Converted at the exchange rate of US$1.3594 = €1 used by the claimants, this is equivalent (in round numbers) to €550,000.

The claimants have also included claims for wasted expenditure in employing crew members and maintaining the Yacht while repairs were carried out or, in the alternative, for loss of use of the Yacht during this period. The loss of use claim was put primarily as a claim for loss of income from chartering, but a claim was also asserted for loss of personal use, measured by reference to lost return on the capital deployed.

Although both parties served expert reports on the chartering capacity of the Yacht, in the event this evidence fell largely by the wayside and the defendant’s expert was not cross-examined. In my view, the evidence about charter rates was essentially irrelevant, as it is very unlikely that the Yacht would have been chartered for any significant part of the period of six months required for inspection and repairs in circumstances where:

If the Yacht had been chartered at all before the spring of 2011, I find that it would at most have been for a few odd weeks and that the income earned would not have defrayed the running costs during the relevant period.

In circumstances where Mr Hirtenstein bought the Yacht, not as a business investment, but for his personal enjoyment and as what he described in one email to Mr Candy as “about the most vanity purchase a guy needs to make”, I also do not consider that the claim for loss of use measured in terms of loss of return on capital is valid. The case of West Midlands Travel v Aviva [2013] EWCA Civ 687; [2014] Lloyd’s Rep IR 66, relied on by the claimants, involved a business asset (a bus) and is clearly distinguishable. The claimants might have recovered the costs incurred in chartering another yacht, as Mr Hirtenstein did after the engine breakdown; however, such a claim has not been made.

Realistically, therefore, as was effectively conceded by counsel for the claimants in their written closing submissions, the claimants were unable to show any loss of profitable use of the Yacht exceeding their actual expenditure incurred in owning and maintaining the vessel during the period when it was unavailable for use. In support of their claim for such expenditure, the claimants produced a schedule of costs said to have been incurred between July 2010 and April 2012 in paying for the Yacht’s crew, insurance, management fees and class survey (upon completion of repairs). These costs amount in total to US$1,139,865 (or €838,506). On the basis that these costs were incurred over a period of 21½ months and I am taking six months as a reasonable period for inspection and repair, I consider that a reasonably generous estimate of wasted expenditure is €250,000.

A letter of claim enclosing the Patton Marine survey report was sent by Hill Dickinson to Candyscape Ltd on 26 January 2011. As well as a response from Clark Ricketts, this provoked an email dated 10 February 2011 from Mr Candy to Mr Hirtenstein in which Mr Candy asserted that he was “categorically not responsible, either contractually or morally”, for what happened to the Yacht and that any claim would be vigorously defended. He nevertheless indicated he was open to discussion.

Mr Hirtenstein replied on 12 February 2011 acknowledging that the Yacht was “cosmetically kept in mostly good condition”, but saying that “it was quite the opposite on the mechanical side”. Mr Hirtenstein said that “it wasn’t just the starboard engine that basically blew up, but the port engine also has damage that requires $50+k”. That figure seems to me to give an insight into the likely maximum costs that might have been required to repair the port engine, since there is no likelihood that Mr Hirtenstein would have understated the expected amount. He went on to make it clear that he was looking for substantial damages but also agreed with Mr Candy that they had some mutual friends and that they were both “smart enough to know [that in] any litigation it’s the lawyers that usually do best”.

Mr Candy responded on 14 February 2011 repeating his categorical denial of responsibility but also suggesting that they should meet up and discuss the issue at some point. This never happened, as shortly afterwards Candyscape Ltd was put into liquidation and Hill Dickinson then came to realise that the warranty in the sale contract was not after all backed by Mr Candy’s guarantee.

I think it likely that, if the claimants had had the benefit of a personal guarantee from Mr Candy of the warranty of the Yacht’s condition, the claim against Candyscape Ltd and Mr Candy would have been settled. Putting a figure on the likely amount of the settlement – or, more realistically, a figure which falls as nearly as possible in the middle of the range of possible outcomes – is not a precise exercise. In thinking it likely that there would have been a settlement and in estimating the likely amount, I attach considerable weight to the claim under the Yacht’s hull and machinery insurance which was settled in June 2011. Particularly given the substantial overlap between the two claims, I think it reasonable to infer that Mr Hirtenstein could and would have settled his claim for breach of warranty for a similar sum – which I would assess (net of the costs incurred in its recovery) at US$700,000 or €500,000. The chance that the claimants would have recovered more than this if the claim had been pursued to a judgment is in my view counterbalanced by the significant irrecoverable costs and risks (including the risk of failing to recover more than the amount of any Part 36 offer) involved in such litigation.

My assessment of the likely recoverable amount assumes that a settlement would have been reached by the end of 2011 or that, if it was not, the amount subsequently recovered would have been increased by a sum representing interest at a commercial rate.

Damages on a withdrawal basis

I will next assess what damages the claimants would have been entitled to recover on the assumption (which I have rejected) that they would have withdrawn from the transaction and would therefore not have purchased the Yacht had Hill Dickinson not been negligent.

It is often said that the normal measure of damages where property is acquired as a result of the negligence of a solicitor (or surveyor) is what is described as the ‘diminution in value’ rule. What is meant by this description is not in fact a diminution in value but the difference between the price paid for the property and its market value at the time of purchase: see e.g. Oates v Anthony Pitman & Co [1998] PNLR 683, 691. I doubt, however, whether there is on a proper analysis any such rule.

The cases recognise that the so-called ‘diminution in value’ rule is not an “invariable approach” and “should not be mechanistically applied in circumstances where it may appear inappropriate”: see County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 WLR 916, 925 (cited in many subsequent cases). A variety of other approaches have indeed been used in the decided cases: see e.g. Jackson & Powell on Professional Liability (7th Edn), paras 11-288 – 11-295; Greymalkin Ltd v Copleys [2004] EWHC 1155 (Ch); [2004] PNLR 44, paras 79-84. In Reeves v Thrings & Long [1996] 1 PNLR 265 at 278, Sir Thomas Bingham MR (in a judgment dissenting on liability) said:

"The assessment of damages is ultimately a factual exercise, designed to compensate but not over-compensate the plaintiff for a civil wrong he has suffered. While this is not an area free of legal rules, it is an area in which legal rules may have to bow to the peculiar facts of the case."

While this must certainly be true, it does not mean that in assessing damages courts are making a series of ad hoc judgments detached from legal principle. In an elegant recent analysis in the Law Quarterly Review, Andrew Dyson and Adam Kramer have shown that the appropriate date at which to assess the claimant’s loss and whether it should be measured by reference to the market value of property depend in every case upon the application of the basic compensatory principle and the mitigation principle. (Footnote: ⁵)

One reason why in cases involving real property or other non-fungible property such as luxury yachts the ‘diminution in value’ rule does not make sense is that a claimant who acquires such property as a result of negligent advice cannot instantly sell it. The property would have to be marketed, a buyer found and a sale agreed before its value could be realised. In the case of the Yacht, the delay involved is likely to have been significant. The experts agreed that a sale of the Yacht in its damaged condition could be expected to take 18 months and that, even in good condition, the Yacht would typically have taken at least a year to sell. In these circumstances assessing the market value of the Yacht (i.e. the estimated amount for which it should exchange between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion (Footnote: ⁶)) at the date of purchase is not on any view an appropriate measure of the claimants’ loss since they could not conceivably have realised that amount by selling the Yacht on that date.

A second reason why assessing the claimant’s loss at the date of purchase is not appropriate as a general rule in cases of this nature is that the claimant may not discover that the property has a defect until some time after the purchase. It can seldom, if ever, be appropriate to assess the claimant’s loss on a basis which would require the claimant to have sold the property before he or she was aware that it was defective. In the present case the defect in the mechanical condition of the Yacht’s starboard engine in fact manifested itself within about an hour of completion of the purchase, but it was necessary to investigate the extent of the damage and its cause before the claimants could reasonably be expected to take any responsive action by repairing or selling the Yacht.

In support of their submission that the relevant date at which to assess the value of the yacht was the date of purchase counsel for Hill Dickinson cited Byrne v Pain & Foster [1999] 1 WLR 1849. In that case the Court of Appeal held that a cause of action in tort accrued when the plaintiffs, relying on a negligent valuation report, contracted to purchase a residential property which was worth less than they had been led to believe. However, this decision is simply an application of the principle established by Forster v Outred [1982] 1 WLR 86 and subsequent cases that a person suffers ‘actual damage’ for the purpose of constituting a tort as soon as she is exposed to a liability, even a contingent liability, which reduces the economic value of her assets, and not merely when money is actually paid away. It does not assist in determining how the claimant’s loss should be measured in order best to give effect to the compensatory principle.

In most cases where a claimant acquires defective property as a result of negligent advice, the claimant after discovering the defect may choose to extricate himself by selling the property or may choose to keep the property (and in the latter case may take steps to rectify the defect). If the claimant chooses to sell the property rather than carry out repairs at substantial inconvenience and expense, it may be difficult for the defendant to argue that repairing the property was a course which the claimant could reasonably have been expected to adopt, even if it would have been cheaper. If on the other hand the claimant chooses to keep the property, selling the property is only likely to be seen as an option which the claimant could reasonably be expected to adopt if the cost of repairing the defect would exceed the loss on such a sale.

If Mr Hirtenstein had chosen to extricate himself by selling the Yacht, it might have been appropriate to value the benefit received on the basis of the net proceeds of sale. However, he did not. He decided to keep the Yacht. Moreover, as discussed earlier, it was the uncontradicted evidence of the claimants’ valuation expert that the Yacht could only have been sold in its damaged condition at a discount to its value in good condition which substantially exceeded the cost of repairs. It would be wrong to value the benefit which the claimants received from acquiring the Yacht by reference to the proceeds of a hypothetical sale which the claimants did not make because they chose a cheaper reasonable alternative.

As discussed earlier, however, Mr Hirtenstein chose not merely to repair the damage to the Yacht but to replace both engines with brand new engines and to refurbish the Yacht. It is clear from the expert evidence that the additional cost of undertaking this work did not translate into a corresponding increase in the market value of the Yacht – as indeed Mr Hirtenstein was advised would be the case when he opted for the “repower”. I have already held, applying the mitigation principle, that the additional cost (and time) involved in carrying out this work compared with simply repairing the engines is to be regarded as a choice made by the claimants rather than a consequence of the defendant’s wrongdoing. Once such repairs had been carried out, Mr Hirtenstein could have chosen to put the Yacht on the market and have sold the Yacht in good condition. It seems to me reasonable in these circumstances to value the benefit he received by reference to such a hypothetical sale and to treat any subsequent diminution (or appreciation) in the market value as a consequence of his decision to keep the Yacht instead for his own use.

Accordingly, the appropriate way to assess the claimants’ loss resulting from the purchase of the Yacht is in my view to add to the price of €4.5m paid by the claimants the cost of the repairs reasonably required to restore the Yacht to good condition, which I have estimated at €550,000. The additional expenditure of €250,000 required to maintain the Yacht until the completion of the repairs should also be brought into account, giving a total outlay of €5.3m. The value of the Yacht should then be assessed by estimating the amount that could have been realised if Mr Hirtenstein had sold the Yacht following the completion of repairs. I have found that the repairs could not reasonably have been completed sooner than six months from the date of the purchase and that, from the time when the Yacht was put on the market, it could be expected to take a year to sell. On this basis it seems to me that the appropriate date at which to estimate the market value of the Yacht in good condition is a date in early 2012.

Both parties adduced expert evidence as to the market value of the Yacht in good condition in April 2012. That date was chosen because it was the date when the work of refitting the Yacht was in fact completed. In my view, it is an appropriate date at which to value the Yacht, albeit for the different reasons which I have given.

In his first report, the claimants’ expert, Mr Gilmour, used two different approaches to estimate the value of the Yacht in April 2012. The first approach was based on the asking price of the Yacht at the date of purchase in July 2010, which was €6.95m. Mr Gilmour then looked at market trends over the period 2010-2012 and estimated that between July 2010 and April 2012 there was an overall average decrease in asking prices for luxury yachts in all sizes of around 21%. Applying this discount factor produced an estimated asking price for the Yacht in April 2012 of €5,547,400. To translate this asking price into an estimated sale price, Mr Gilmour allowed a negotiation discount of 15%. This produced a valuation of €4,715,300.

Mr Gilmour’s second approach was to derive an estimated asking price for the Yacht in April 2012 from an analysis of the asking prices of 16 roughly comparable yachts which were sold or offered for sale at around that time. After adjusting for differences in age, length, gross tonnage, brand etc, Mr Gilmour derived from this analysis an estimated asking price for the Yacht of approximately €6m. Although he considered that a discount for negotiation of 15% would ordinarily be appropriate, he reduced this to 10% to take account of potential betterment resulting from the replacement rather than repair of the engines. As I consider that the valuation should be made on the assumption that the engines were repaired rather than replaced, this reduction is not appropriate. Applying a 15% negotiation discount gives an estimated market value of €5.1m.

In his report Mr Gilmour expressed the view that his second approach produced a more accurate estimate. It seems to me that this must certainly be right. Adjusting an asking price in July 2010 by reference to subsequent average movements in asking prices across the entire market for yachts of all sizes, ages etc seems a very crude method. I accept My Gilmour’s view that it is preferable to base the valuation on actual asking prices of comparable yachts at the time of the assumed sale.

Mr Gilmour’s evidence was something of a moving target. He kept producing new valuations and ‘refining’ his existing valuations up to and during the trial. In the expert’s second joint memorandum, which was produced in the course of the trial, Mr Gilmour came up with a third approach to estimating the value of the Yacht in April 2012. This involved an analysis of the movement in asking prices of nine roughly comparable yachts which were on the market in July 2010 and which were still on the market in April 2012. Mr Gilmour derived from this analysis an average fall in asking price per metre over the period, which he then applied to the Yacht. This produced an estimated reduction in asking price of approximately €1.6m and accordingly resulted in an estimated asking price for the Yacht in April 2012 of €5.35m. Given the very late stage at which this valuation was produced, I do not think it would be fair to take it into account. In any event, the method seems to me to be flawed. By limiting the sample to yachts which had not been sold despite having been on the market for some 20 months, it seems to me that the selection was biased in favour of yachts which are likely initially to have been significantly overpriced. It would seem to me much fairer to base the analysis on yachts which were actually sold in or around April 2012 irrespective of how long they had been on the market, as Mr Gilmour did in his previously preferred approach.

The defendant’s expert, Mr Chettleborough, in order to value the Yacht in April 2012 used as a starting point his estimate of the market value of the Yacht in good condition in July 2010, which was €6.5m. He then deducted depreciation at 5% per annum for two years. Leaving aside his view about betterment resulting from the actual work done, which as indicated I do not consider relevant, this produced a valuation of €5,866,250.

I am unable to place reliance on this valuation for two reasons. First, as a general matter I found Mr Chettleborough’s evidence on the question of valuation of very little assistance. That is because Mr Chettleborough did not set out in his report, and was unable to articulate, the process by which he arrived at his valuation of the Yacht in July 2010. Although Mr Chettleborough listed in his report a number of ‘comparable’ yachts on the market at that time, he did not apply any rational method to derive an appropriate asking price for the Yacht from the asking prices of the yachts in this sample. Indeed, Mr Chettleborough said that he did not consider asking prices to be relevant to the task of valuation at all. Since the only information which Mr Chettleborough had for the ‘comparable’ yachts was their asking prices and not their actual sale prices, it is difficult to see how he could have used this information without making some implicit discount for negotiation. Mr Chettleborough said in his report and agreed in the first experts’ joint memorandum that yachts were selling at the time for up to 30% less than their asking prices. He was nevertheless unable to say what discount he had assumed.

Mr Chettleborough’s valuation approach effectively involved putting the available information into a black box from which a figure emerged based entirely on his gut feel. The problem with a valuation pronounced ex cathedra in this way is that it is not capable of being tested or subjected to any rational scrutiny. It amounts to saying “trust me, I am an expert valuer”. However, unless the expert is able to point to some objective evidence to demonstrate the reliability of his judgment – which Mr Chettleborough was not – it is not acceptable in the context of litigation to be asked to take an expert’s opinion on trust. Experts’ opinions, if they are to be accorded any weight, need to be supported by a transparent process of reasoning.

Secondly, as Mr Chettleborough accepted, applying a discount for depreciation to the value in July 2010 to arrive at a value in April 2012 simply reflected the fact that the Yacht was nearly two years older in April 2012. It took no account of movements in market prices over the period. In these circumstances, even if I had thought his starting point was reliable, I could not regard Mr Chettleborough’s approach as a reasonable one to use in order to value the Yacht in April 2012.

I accordingly consider that the best estimate of the market value of the Yacht in good condition in April 2012 is the preferred estimate of Mr Gilmour in his first report (and in the experts’ first joint memorandum), adjusted to allow a 15% discount for negotiation, in the sum of €5.1m. For completeness, I would add that if I had thought that the appropriate date at which to value the Yacht was July 2010, I would have found the best estimate of that value to be the one made by Mr Gilmour in his first report in the amount of €5.9m. To calculate the amount actually realisable by the claimants, it is necessary to deduct the brokerage expenses of around 5% which would have been incurred on a sale of the Yacht. Applying this deduction to the sum of €5.1m gives a net figure of €4.85m.

The difference between the claimants’ total outlay of €5.3m and the realisable value of the Yacht, which I have assessed at €4.85m, is €450,000. I therefore find that this is the amount of the financial loss which the claimants suffered as a result of purchasing the Yacht.

Limitation of liability

Hill Dickinson have contended that their liability for this claim is in any event limited to £3 million by clause 15 of their standard terms of business (quoted in paragraph 36 above). The terms of business were attached to the formal retainer letter sent to Mr Hirtenstein’s accountant, Mr Gould, at 15.11 on Wednesday 14 July 2010. The letter included details of Hill Dickinson’s charges and followed an exchange of emails the previous day in which Mr Lawson had promised to send to Mr Gould “a retainer letter with rates, terms, scope etc later on today or first thing tomorrow”. As mentioned earlier, the email attaching the retainer letter was forwarded immediately on receipt by Mr Gould to Mr Hirtenstein.

There was no express acceptance of the terms contained in Hill Dickinson’s retainer letter; but by continuing to instruct Hill Dickinson after receiving the letter, I find that Mr Hirtenstein impliedly agreed to contract on those terms.

Although clause 15 does not expressly refer to negligence, I see no reason not to give the clause its plain meaning and to construe it as applying to claims for professional negligence against Hill Dickinson, which are the obvious kind of claim that a solicitor’s firm is likely to face. However, pursuant to section 2(2) of the Unfair Contract Terms Act 1977, liability for negligence cannot be excluded or restricted by reference to a contract term except insofar as that term satisfies the requirement of reasonableness set out in section 11 of the Act. It is well settled that the burden of pleading and proving that this requirement is satisfied lies on the party who is seeking to exclude or limit its liability.

Hill Dickinson have neither pleaded nor made any positive attempt to show that it was reasonable for them to limit their liability to £3 million in this case, and I do not consider that it was.

Mr Hirtenstein was an experienced and capable businessman, well able to look after his own interests. There was not in these circumstances any inherent disparity in bargaining power between the parties. However, by the time when the retainer letter attaching Hill Dickinson’s terms and conditions was sent to Mr Hirtenstein, he had already instructed Hill Dickinson and discussed the work that they were to do in his two telephone conversations with Mr Lawson the previous day, and Mr Lawson was in the process of carrying that work out. Amongst other things, the draft contractual documentation (including the proposed condition warranty) had already been prepared by Mr Lawson and sent to Clark Ricketts. To complete the transaction on the Friday, as Mr Hirtenstein had agreed to do, required a lot of work to be done in a very short time. As Mr Hirtenstein put it in an email sent to Mr Lawson at 16.42 on Wednesday 14 July, “I am BUSTING MY ASS on 10+ different items to try and close asap”. In this situation, by the time he had received Hill Dickinson’s terms and conditions less than two hours earlier, Mr Hirtenstein was already committed to retaining Hill Dickinson and there was no realistic possibility of him switching solicitors if he did not want to lose the deal.

Furthermore, the limitation of Hill Dickinson’s legal liability was not brought specifically to Mr Hirtenstein’s attention. It was not mentioned in the retainer letter (or the covering email) and there is no suggestion that Mr Lawson had mentioned it in his telephone conversations with Mr Hirtenstein the day before.

Paragraph 2.07 of the Solicitor’s Code of Conduct 2007, which was applicable at the time, permitted a firm of solicitors to limit its liability, provided that such limitation (a) was not below the minimum level of insurance cover required (which was £3million), (b) was brought to the client's attention, and (c) was in writing. The second of these conditions was not complied with by Hill Dickinson and reliance on clause 15 of their standard terms to limit their liability is therefore a breach of the solicitors’ professional code. Although that does not automatically make the purported limitation of liability unreasonable for the purpose of the Unfair Contract Terms Act, it seems to me a powerful indication.

In these circumstances I find that Hill Dickinson have failed to show that the term restricting their liability to £3 million was a fair and reasonable term to include in their contract with the claimants.

I can summarise my conclusions as follows:

In the result, although the claimants have succeeded on liability, they have suffered no loss and are therefore entitled to judgment for only nominal damages.