Air Studios (Lyndhurst) Ltd (t/a Air Entertainment Group) v Lombard North Central Plc

The principal issue in this case is whether a binding contract was concluded by e-mail on 19 August 2011 for the sale of certain second hand electronic equipment by the defendant (“Lombard”) to the claimant ("Air Studios"). Air Studios maintains that such a contract was concluded, while Lombard denies this, saying that no contract was concluded or alternatively that any contract was too uncertain to be binding. There are also issues about the measure of damages, including whether an available market for the purchase of such equipment existed, in the event that Air Studios succeeds on liability.

In outline, the parties were negotiating for the sale of equipment used in the film, television and audio post-production business. This was equipment which had been leased by Lombard under three lease agreements to a company called Future Post Production Ltd, which had become insolvent. The negotiations culminated in an exchange of e-mails on 19 August 2011. It is Air Studios’ case that it made a firm offer to purchase all the equipment which was covered by the three leases for £100,000, which offer was accepted by Lombard in an e-mail sent at 15.08 hours on 19 August, thereby giving rise to a binding contract. Lombard, however, denies that Air Studios’ offer was a firm offer, as it stated that there would need to be a sale contract, while the e-mail on which Lombard relies as an acceptance of that offer itself indicated and sought Air Studios’ agreement that any contract would have to be on Lombard’s standard terms, a point which Air Studios never accepted.

Alternatively, Lombard says that any concluded agreement between the parties was too uncertain to amount to a binding contract, primarily because there was no agreement as to the assets which were to be included in the sale, but also because other terms such as the responsibility for and timing of the collection of the equipment from Future Post’s premises and the passing of title had not been agreed. The issue as to what assets would be included has two elements. The first is whether (as Air Studios contends) the parties were negotiating for the sale of all the equipment which was the subject of the three leases, or only (as Lombard contends) for such of the equipment as still remained at Future Post’s premises in circumstances where Lombard had been unable to identify some of the equipment when it had carried out an inspection. The second is whether (as Air Studios contends) the equipment which was the subject of the sale included a console or desk used for the purpose of dubbing speech on to film or only (as Lombard contends) upgrades to the software used on that console but not the console itself.

There is a further pleaded issue whether, if a binding contract was concluded, Air Studios was in repudiation of the contract, but that issue fell away during the trial in the light of the way that Air Studios puts its case and I say no more about it.

In deciding whether the parties have reached agreement, the whole course of the parties' negotiations must be considered and an objective test must be applied: Chitty on Contracts, 31^st edition (2012), Vol 1, paras 2-028 and 2-029. Once the parties have to all outward appearances agreed in the same terms on the same subject matter, usually by a process of offer and acceptance, a contract will have been formed. The subjective reservations of one party do not prevent the formation of a binding contract. Further, it is perfectly possible for the parties to conclude a binding contract, even though it is understood between them that a formal document recording or even adding to the terms agreed will need to be executed subsequently. Whether they do intend to be bound in such circumstances, or only as and when the formal document is executed, depends on an objective appraisal of their words and conduct.

These principles are well established. They were summarised, for example, by Lord Clarke giving the judgement of the Supreme Court in RTS Flexible Systems Ltd v. Molkerei Alois Muller GmbH [2010] UKSC 14, [2010] 1 WLR 753 at [45]:

“The general principles are not in doubt. Whether there was a binding contract between the parties and if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”

Lord Clarke went on at [49] to set out the well known summary of the relevant principles by Lloyd LJ in Pagnan SpA v. Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 619, adding that the same principles apply where the question is whether a contract was concluded in correspondence as well as by oral communications and conduct:

“(1)

In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole...

(2)

Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary 'subject to contract' case.

(3)

Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed...

(4)

Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled...

(5)

If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.

(6)

It is sometimes said that the parties must agree on the essential terms and it is only matters of detail which can be left over. This may be misleading, since the word 'essential' in that context is ambiguous. If by 'essential' one means a term without which the contract cannot be enforced then the statement is true: the law cannot enforce an incomplete contract. If by 'essential' one means a term which the parties have agreed to be essential for the formation of a binding contract, then the statement is tautologous. If by 'essential' one means only a term which the Court regards as important as opposed to a term which the Court regards as less important or a matter of detail, the statement is untrue. It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the Judge [at page 611] 'the masters of their contractual fate'. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called 'heads of agreement'.”

The fourth of these principles was already well established by the time of Parker J’s judgment in Von Hatzfeld-Wildenburg v. Alexander [1912] 1 Ch 288. Parker J said at 288:

“It appears to be well settled by the authorities that if the documents or letters relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case, there is no enforceable contract either because the condition is unfulfilled or because the law does not recognise a contract to enter into a contract. In the latter case, there is a binding contract and the reference to the more formal document may be ignored.”

I refer also to the helpful summary by Andrew Smith J in Bear Stearns Bank plc v. Forum Global Equity Ltd [2007] EWHC 1576 (Comm) at [171]:

“The proper approach is, I think, to ask how a reasonable man, versed in the business, would have understood the exchanges between the parties. Nor is there any legal reason that the parties should not conclude a contract while intending later to reduce their contract to writing and expecting that the written document should contain more detailed definition of the parties' commitment than had previously been agreed.”

More recently, this principle was applied by the Court of Appeal in Immingham Storage Company Ltd v. Clear Plc [2011] EWCA Civ 89, 135 Con LR 224. The facts there were particularly compelling in favour of a conclusion that the parties intended to be bound notwithstanding the contemplation that a formal contract would be signed in due course. The parties had reached express agreement in writing as to the application of one party’s standard terms and conditions; certain subjects (board approval and tank availability) which had previously been stipulated had been lifted; the defendant had been expressly assured of the availability of the tank space in question and that it could now proceed to source its product; and the reference to a formal contract to be sent was stated to be in confirmation of what had been agreed. Giving the judgment of the court, David Richards J at [19] and [25] contrasted these factors with a case where agreement was stated to be subject to contract or subject to execution of a formal agreement and observed that they pointed overwhelmingly to an intention to create a contract. He added:

“Set against those factors, the provision that a ‘formal contract will then follow in due course’ does not indicate that the claimant's acceptance of the signed quotation will be no more than an agreement subject to contract.”

Of course, these facts were merely an example, albeit a particularly strong one, of a case falling on one side of the line. Each case will depend on its own facts.

Because the existence of a binding agreement needs to be determined objectively and does not depend on the parties' subjective state of mind, evidence from the parties about what they intended by or understood from their written communications is of little or no relevance. There was a certain amount of such evidence from the witnesses on both sides in this case, despite the fact that the objective nature of the question was common ground, but such evidence was of no real assistance when all of the parties’ relevant exchanges were in writing. The evidence was, however, relevant in informing me of the background against which the parties' negotiations took place.

Witness statements were provided and oral evidence was given by two witnesses on each side. Mr Richard Boote and Mr Paul Woolf, the chairman and chief executive of Air Studios, gave evidence on its behalf. Lombard’s witnesses were Mr Timothy Howard, formerly an asset manager employed by Lombard and the individual most closely involved with the sale of the equipment after Future Post went into liquidation, together with his more senior colleague Mr Andrew Elliott whose direct involvement was limited. All four witnesses were doing their best to assist me, and their evidence was generally reliable, although coloured to some extent by their subjective views as to what they intended or understood by the various messages. However, there were some aspects of Mr Howard’s evidence which I am not able to accept, such as his confidence that the liquidator's agent Mr Derek Tidman (who did not give evidence, written or oral) had explained to Air Studios that Lombard only owned the software upgrades and not the Gemini console; nor can I accept Mr Howard’s rather odd insistence that his e-mails automatically generated a link to Lombard’s standard terms and conditions, when it was apparent from the documents in evidence that this was not the case. These and some other answers appear to reflect a degree of wishful thinking on his part.

Expert evidence on quantum was given in writing by a single joint expert, Mr Gavin Marriott, a chartered valuation surveyor specialising in the valuation and disposal of machinery and business assets. He provided a written report, which he supplemented in further correspondence responding to the parties' questions.

It was common ground that, so far as liability is concerned, the following issues arise:

My findings of fact are set out below. It will be convenient to identify the parties' competing submissions and my conclusions upon them in the course of making these findings. I will then be in a position to state my conclusions on the issues identified above relatively briefly.

Lombard provides finance for the acquisition of assets by way of lease purchase agreements. In 2007 it entered into three such agreements with its customer, Future Post (which traded also as Pepper Post), for equipment used in television and audio post-production. The leases were as follows:

Future Post traded from two sites in Soho, one in Greek Street and the other at 25 Noel Street. The equipment which was the subject of the three Agreements was located at the Noel Street premises.

Future Post went into voluntary creditors’ liquidation on 29 June 2011 and as a result the three Agreements terminated. The balance remaining outstanding at that time amounted in total to £64,297.34 broken down as follows:

Lombard therefore sought to sell the equipment which was the subject of the Agreements at the best price obtainable, as it was entitled to do. Its primary concern was to obtain the amount outstanding on the Agreements, but it was also conscious of its duty to obtain the best price that it could, so that any surplus could be returned to the liquidator. As a first step it instructed an experienced valuer, Mr Mark Wray, to inspect the equipment at the Noel Street premises and to provide a valuation. Mr Wray visited the premises and, on 12 July 2011, reported his findings to Mr Howard. He raised two points of concern. The first was that he identified a doubt as to whether Lombard owned the Neve console, as it appeared that Lombard had only financed the software upgrades to the console and not the acquisition of the console itself. The second was that some of the miscellaneous items of equipment which were the subject of Agreement 1367 appeared not to be at the premises, or at any rate could not be positively identified. He listed these items. In discussions by e-mail with Mr Derek Tidman, who had been appointed by the liquidator of Future Post to deal with the realisation of assets in the liquidation, Mr Howard acknowledged that the points raised by Mr Wray might prove problematic.

At this stage there were two potential buyers who were expressing interest in the equipment. One was a company called Halo, and the other was the claimant, Air Studios. Both these companies traded as film, television and audio post-production facilities. So far, Air Studios was dealing with Mr Tidman rather than with Lombard directly. It appears that Mr Tidman provided to both potential buyers a summary prepared by Mr Howard of the amounts outstanding under the three Agreements as set out in [19] above. However, no further progress in selling the assets was made at this stage because of the uncertainty over which assets the subject of Agreement 1367 were still available. Mr Tidman thought that a buyer would not be willing to pay the full amount required to settle what was outstanding when some of the equipment was missing, while Mr Howard thought that a price of £64,297.34 was a fair price for the assets which were available and was not willing to take less.

It seems that on or about 22 July 2011 after direct communication between Mr Howard and Mr John Rogerson of Halo, Lombard came close to concluding a sale of the equipment to Halo at the settlement price, but in the event this did not proceed.

On 9 August 2011 discussions between Mr Tidman and Air Studios were continuing. At this stage Air Studios was interested in taking over the Noel Street premises as well as the equipment belonging to Lombard. Mr Tidman sent an e-mail to Mr Paul Woolf, the chief executive officer of Air, summarising the position as he saw it. This message stated that not all of the items of equipment covered by Lombard’s Agreement 1367 had been conclusively identified at the site. It attached a schedule showing the various items in different colours according to whether or to what extent they had been positively identified.

At some point around this time Mr Richard Boote, the chairman of Air Studios, inspected the Noel Street premises. His view was that all or virtually all of the equipment covered by Agreement 1367 was indeed present at the premises. His principal interest was in the Gemini console.

Accordingly Air Studios knew that there was at any rate a question, at least at this stage, whether all the equipment covered by Agreement 1367 was available.

On 11 August 2011 Mr Boote contacted Mr Howard directly for the first time, introducing himself and expressing interest in taking over the Future Post facilities in Noel Street. His e-mail continued:

“To this end I have received full details of the three leases currently in place. This includes a summary from your self which is why I am contacting you. We would like to settle these leases at the values mentioned in the summary. We would wish to do this even if the sale of Noel Street to us falls away.”

There is an issue as to what was meant in later e-mails, to which I refer below, by the expression “Lombard summary” and the evidence about this was not entirely clear. It is therefore not possible to identify with confidence what document was referred to. However, it is clear from this message that the expression here refers to a summary provided by Mr Howard setting out the sums outstanding under the three Agreements. That is apparent from the fact that the summary is referred to as something which mentions “the values”, that is to say the amounts outstanding under the leases. In my judgment that is also what was meant, or should reasonably have been understood as being meant, by the references to the “Lombard summary” in later e-mails.

This initial expression of interest was not pursued. Some days later, however, on 18 August 2011 Mr Howard e-mailed Mr Boote to inform him that Lombard had received an offer which it regarded as acceptable (this was an offer from Halo to pay the amounts outstanding, although Mr Howard did not say so) and to inquire whether Air Studios wished to make a further offer. He wrote (underlining added by me for emphasis but capitals as in original):

“We have had an offer upon the assets under the three agreements that is acceptable to us.

Out of courtesy I am contacting you to see if you are still interested in the assets?

If so, we require a FINAL offer by 12 noon tomorrow (Friday 19^th August). Obviously the offer will have to reflect the market value of the assets based in situ. Please respond by email to confirm your offer for all of the assets under agreements numbers:

AO11000394

AG37001367

AT30000316”

Miss Joanna Smith QC for Air Studios submits that this was the document which defined the basis on which Air Studios was being invited to bid. She relies upon the words which I have underlined as showing that Air Studios was being invited to bid for all of the assets which were covered by the three Agreements and not merely for those assets which Lombard had been able to identify as being present at Noel Street. She draws attention also to the absence of any explanation that the asset which was the subject of Agreement 394 consisted of the software upgrades only and not the console itself and to the fact that what was requested, here and in later messages, was a “final offer”.

Miss Victoria Windle for Lombard, however, submits that this e-mail should be understood as referring only to those items of equipment which were available for sale, and that Lombard reasonably believed that Air Studios understood the e-mail in this way. I do not accept this submission. The e-mail is absolutely clear in referring to “all the assets” under the three Agreements, and there is no reason why Air Studios should not have understood it as meaning what it said, as in fact Mr Boote did. The fact that there had been some difficulty some days earlier in identifying the relevant assets under Agreement 1367, and that Air Studios knew this, does not require any different conclusion. It was entitled to conclude from this e-mail that the situation had since been resolved. Similarly, the reference to the asset under Agreement 394 should reasonably have been understood and was in fact understood by Air Studios as a reference to the console and not merely the software upgrades. Even if Mr Howard subjectively intended this to refer only to the software upgrades, a point which I do not accept, that is not how the e-mail would reasonably have been understood. Miss Windle accepted that Air Studios had not in fact been told by Lombard or by anybody else that Lombard only owned the software upgrades, but she submitted that Lombard reasonably believed that Air Studios had been told this. However, there was no reasonable basis which could have caused Lombard to believe that Air Studios was aware of this and (if it matters) I am not persuaded that Mr Howard did in fact believe that Air Studios did know this.

It follows that I accept Miss Smith’s submission that this e-mail defined the basis on which Air Studios was being invited to bid, that the bid requested was unequivocally a bid which would cover all of the equipment under the three Agreements, not merely those which had been positively identified as being present, and that in the case of Agreement 394 the bid was to be for the Gemini console and not merely the software upgrades. I accept also that the reference here and in later messages to the need for a "final” or "unconditional" bid demonstrated that what Lombard was asking for was an offer which would be capable of a clean acceptance so as to give rise to an immediately binding contract without further ado. It was of course possible that the basis on which the parties were negotiating, and the nature of what Lombard was seeking, would subsequently change in some or all of these respects before a contract was concluded, and that even if presented with such a firm offer Lombard would counter instead of accepting it cleanly. I examine below whether this occurred. However, this is what Lombard requested at this stage.

Mr Boote’s response, also on 18 October 2011, was as follows:

“As discussed, my offer is the settlement figures as per your summary and this offer still stands.”

As before, it is apparent here that the summary referred to is Mr Howard’s summary of the amounts outstanding under the Agreements. The summary, in other words, relates to the settlement figures rather than identification of the assets.

This offer was declined by return. Mr Woolf then e-mailed Mr Howard asking if Mr Howard could give “an indication of what would be acceptable.”

Mr Howard’s response, still on 18 August 2011, was that he could not divulge what figure would be acceptable as this would be unfair to the other parties involved. He continued:

“Please submit your final offer that, in your view, would reflect the value of the assets to you by 12 noon tomorrow (Friday 19 August). Please note that the assets will be sold as is where is (ex site) will be the customers responsibility to provide the landlord with suitable method statements of extraction where required.”

Although something seems to have gone wrong with the wording of the last sentence, it is clear that the offer being sought was on the basis that it would be the buyer’s responsibility to collect the equipment from the site at its own expense. Once again, a final offer capable of acceptance was requested, in the context of a competitive bidding process.

Mr Woolf tried again to obtain some further information, asking whether the competing bidder was taking over the premises as well as the equipment or just the equipment, but Mr Howard maintained his determination not to divulge any information about what other parties were offering. He repeated his request for Air Studios to confirm its “final offer by the due date”, that is to say, noon on 19 August 2011.

On 19 August 2011 at 10.20 hours Mr Boote made an offer on behalf of Air Studios as follows:

“Air would subject to contract be prepared to increase our offer for the items on the lease summary, from the settlement figure we spoke about to £100,000. I trust this will be acceptable to you …”

I would make two comments regarding this offer. First, as was common ground, it was expressed to be "subject to contract" and therefore was not an offer capable of being accepted so as to give rise to a binding contract. Therefore it was not what Lombard had been asking for. Second, and leaving the "subject to contract" point on one side, it increased the price which Air Studios was willing to offer, but did not otherwise change the basis of the offer. Miss Windle submits that the "lease summary" referred to either was or might reasonably have been understood as a document prepared by Mr Howard which had listed the equipment identified at the Noel Street premises. However, I do not accept this. So far it had been clear that the "lease summary" referred to in earlier messages had set out the sums outstanding under the Agreements and that the parties were negotiating with a view to the sale of all of the equipment covered by those Agreements. If this e-mail had been intended, not merely to increase the price which Air Studios was willing to pay, but also to change the basis on which the parties were negotiating, much clearer language would have been expected.

The qualification that Air Studios’ offer was "subject to contract” was immediately questioned by Mr Howard, who responded 20 minutes later, at 10.40 hours:

“Please can you clarify what you mean by subject to contract as any offers we receive need to be unconditional.”

This reiterated, as was already clear, that Lombard was seeking an offer capable of being accepted immediately.

Air Studios replied, this time by Mr Woolf as Mr Boote was in the course of boarding a plane, at 10.50 hours on 19 August 2011:

“Our offer is not conditional but there will have to be a sale contract.”

There is an issue between the parties as to the true meaning of this one sentence e-mail. Miss Smith submits that the first part of the sentence ("Our offer is not conditional”) in effect withdrew the previous reference to "subject to contract" and made clear that the offer was indeed unconditional (and therefore capable of being accepted) as had been requested, while the second part (“but there will have to be a sale contract”) explained that Air Studios was contemplating the execution of a formal contract after agreement had been reached, which would no doubt have been necessary or useful for both parties for record-keeping purposes, but which would not affect the binding nature of the agreement which would be reached in the event of acceptance of the offer. Miss Windle, however, submits that the sentence meant that no binding contract would be concluded until the sale contract referred to was executed. This would mean, however, that the two parts of the sentence contradicted each other, the clarification in the first part that the offer was not conditional being immediately superseded by the imposition of a condition to the same effect as the words "subject to contract” which had prompted the request for clarification in the first place.

In my judgment the natural meaning of this e-mail is as submitted by Miss Smith. That is the only meaning which gives proper effect to the sentence as a whole. For Air Studios to have sent a message to the effect submitted by Miss Windle would have made no commercial sense.

At 11.08 on 19 August 2011 Mr Howard sent a further e-mail as follows:

“Just to clarify, the assets will be sold as is where is (ex site) and it will be the purchasers responsibility to provide the landlord with suitable method statements of extraction where required and agree acceptable timescales for removal with the landlord/tenants.

If you are successful in your bid, which we will convey to you after 12 noon today, the selling process will be conducted by the issuing of an invoice with our standard terms and conditions as attached, with the additional comments outlined above.

The goods will pass title to the successful bidder once we have received the agreed funds in full.”

A link to a web address containing Lombard’s terms of sale was included at the foot of the e-mail.

Once again there is an issue as to the effect of this e-mail. The first paragraph merely repeated what was already clear. Miss Smith submits that the second paragraph (“If you are successful in your bid …”) contemplated two steps. First, it contemplated that Air Studios would be notified (if that was the case) that it had been successful in its bid, which could only mean that its offer had been accepted, in preference to that of the competing bidder, so as to give rise to a binding contract upon such notification occurring. Second, it went on to explain the process which Lombard contemplated would then take place in order to draw up the formal contract which both parties would need and which Air Studios had already indicated would be necessary. Miss Windle, however, submits that this e-mail demonstrates an intention to be bound only at the conclusion of this process, so that there could be no binding contract until (at least) acceptance by Air Studios of the Lombard terms and conditions.

I consider that Miss Smith's submission makes better sense of this e-mail. On Lombard’s approach, what was described as a notification that Air Studios had been successful in its bid would in reality be no such thing. It would amount to no more than an expression of willingness to negotiate further (in effect, “if you are successful, we will negotiate with you further”, an interpretation which Miss Smith rightly described as unrealistic). Moreover, those further negotiations would take place in circumstances where (if notification of success was to mean anything) Lombard would be letting the rival bidder go before it had secured a binding commitment from Air Studios. That would not make much commercial sense.

At 15.08 hours on 19 August 2011 came the e-mail which Air Studios contends resulted in a binding contract and which is therefore the critical document in the case. Mr Howard wrote in the following terms (with paragraph numbering added by me for ease of reference):

“(1)

Please accept this email as confirmation that you have been successful with your offer of £100,000 plus VAT for the assets covered by the three agreements AO11000394, AG37001367, AR530000316. Please see attached Excel sheet of the items positively identified by our agent.

(2)

Please provide an order confirming your agreement to progress with the sale based on the Terms and Conditions provided to you within the previous email below, please confirm the invoice address and I will raise a VAT invoice and email a copy to you today.

(3)

Please could you confirm on your order how quickly you will be able to provide us with cleared funds. Once we have obtained cleared funds we will provide consent for you to collect the assets.

(4)

I have been made aware that the new tenants have moved into the premises yesterday, I would therefore like to complete this as quickly as possible to minimise any recourse or delaying tactics that the landlord tenant may try and level against you.”

Miss Smith submits that this e-mail, in particular paragraph (1), constituted a clean acceptance of Air Studios’ offer, so that a contract was concluded at that point, and that the remaining paragraphs of the e-mail do not detract from this conclusion. Miss Windle, however, submits that:

I take these points in turn. As to whether there was correspondence between offer and acceptance so far as the price was concerned, Miss Windle drew attention to the fact that whereas Air Studios’ offer had been to buy the equipment for a price of £100,000, with no mention of VAT, this e-mail from Lombard referred to “your offer of £100,000 plus VAT”. She suggested that there was as a result no correspondence even as to the basic question of price between the offer and its purported acceptance. However, this was clearly not a point which occurred to anyone at the time. It is apparent that Lombard’s reference to “your offer of £100,000 plus VAT” was not intended as a counter offer, but was merely a statement that it had understood Air Studios’ offer to be an offer to purchase the equipment for a price of £100,000 plus VAT and not for a gross price of £100,000 inclusive of VAT. In my judgment that was a correct understanding of the effect of Air Studios’ offer in its context, which context included the fact that, as would have been obvious, Air Studios would have been able to reclaim any VAT which it had paid as part of the purchase price. (I have no doubt, moreover, that if this understanding had not been correct, Air Studios would immediately have said so). Accordingly there is nothing in this VAT point.

As for the items which were to be the subject of any contract, I accept that in order for a binding contract of sale to be concluded there must be sufficient certainty as to what is to be sold. However, as I have already explained, the basis of the parties' negotiations thus far was that Lombard had invited Air Studios to bid for the entirety of the assets covered by the three leases. The issue, therefore, is whether the reference in paragraph (1) of the e-mail to “the attached Excel sheet of the items positively identified by our agent” either made clear that any contract was to be limited to the items thus identified or at any rate introduced sufficient uncertainty about the matter to mean that the parties were no longer operating on the same understanding. In my judgment it did neither of these things. It was merely a statement of fact identifying the items which Lombard’s agent had positively identified. It did not say that any remaining items were not present, or were not intended to be the subject of any sale contract, or that the basis on which the parties had so far been negotiating no longer applied.

As for the fact that there was no agreement as to the terms and conditions which would apply to any contract, that is true but, as indicated at [5] to [11] above, this does not necessarily mean that the parties did not intend to conclude a binding contract at this stage leaving further matters to be agreed subsequently. The real question is whether, viewing the matter objectively, that is what they did intend.

Lombard’s case is that this e-mail made clear that it did not intend to conclude a contract at this stage, that it was merely indicating a wish to pursue a possible contract with Air Studios further, and that no contract could be concluded until, at the least, three things had happened, namely (a) Air Studios submitted a formal written order, (b) that order confirmed its acceptance of Lombard’s terms and conditions, and (c) Air Studios identified the address which should be stated on Lombard’s invoice.

In order to determine whether this e-mail constituted an acceptance of Air Studios’ offer or (in effect) a counter offer stating the terms on which Lombard would be prepared to contract, it is necessary to read the message as a whole against the background which I have set out, and to give it a meaning which makes commercial sense in preference to one which does not. Adopting that approach, I consider that the e-mail was a clean acceptance of Air Studios’ offer to purchase the equipment which gave rise to a binding contract.

That conclusion gives proper effect to the opening paragraph which refers unequivocally to confirmation that Air Studios had been successful with its offer. If in fact the message is read as going on to say that further steps would be necessary before any contract would be concluded, that opening statement would be highly misleading. In my judgment the better reading of the message, which gives effect to it as a whole and also makes commercial sense, is that Air Studios’ offer was accepted with immediate binding effect, and that Lombard went on in the remainder of the e-mail to indicate the further terms which it hoped to agree and the process which it wished to follow in order to implement what had been agreed, but that these matters were not intended to constitute conditions precedent to the conclusion of a binding contract. The fact that some of these matters, such as the provision of an invoice address, were purely administrative and cannot sensibly have been understood as essential to the formation of a contract supports this reading of the e-mail. This conclusion is confirmed also by the context in which the e-mail was sent, which was that Air Studios was known to be participating in a competitive bidding process, in which Lombard had repeatedly requested the submission of a final bid by a stated deadline, after which a firm decision whether to contract with Air Studios would be promptly notified without more ado. In those circumstances Air Studios was entitled to expect a firm decision one way or the other, and reasonably understood the message which it got to be precisely that.

Mr Boote was concerned to learn from paragraph (4) of Lombard’s e-mail that new tenants had moved into the Future Post premises. He made this clear in an e-mail sent on 19 August 2011:

“Is it right that tenants have been moved in before we have removed the equipment? We are talking about very sensitive equipment which is likely to be damaged if moved unsympathetically. I’m not happy that this has happened. I will be back in the UK Monday and will check everything out.”

Mr Howard responded on 22 August 2011, saying that he understood Mr Boote’s concerns, but could not confirm whether the new tenants had moved in yet. He continued:

“Once we have received full funds for the assets, we will be able to provide clearance letters to the landlord/tenant. Access should not be an issue, however you will need to deal with the landlord/tenant to arrange collection …

Please respond to my e-mail below providing an order confirming your agreement to progress with the sale based on the Terms and Conditions provided to you. Please confirm the invoice address and I will raise a VAT invoice and e-mail a copy to you today. Please respond to this by 5 pm today.”

Air Studios did not provide that confirmation and did not provide an invoice address. Instead Mr Boote, who was still out of the United Kingdom, responded later on 22 August 2011:

“I will check the leases and confirm first thing tomorrow. Finance is being arranged so Air will be in a position to settle and remove. Obviously I will need to reinspect the kit as the building has now been occupied and I need to assure my board that the kit we are buying is still as was.”

As shown by an internal message, Mr Howard interpreted this response as Air Studios “messing us about”. Explaining this comment, his evidence was that, at any rate at this stage, his view was that there was an unconditional deal with Air Studios into which Air Studios was now seeking to introduce new conditions. While this subjective opinion is of no real weight, for the reasons already explained, it does perhaps provide some comfort that the conclusion which I have reached on an objective basis from the parties’ written exchanges is not out of line with the understanding of the reasonable commercial people involved at the time.

On 23 August 2011 Air Studios wrote:

“As you know the offer was for the equipment as detailed in the summary and the three Lombard leases. The spreadsheet attached to your email of last Friday afternoon doesn’t appear to include all the items. I attach a list of the equipment I would expect to be included. I understand that Lombard were unable to identify some of this kit when they visited Noel Street. I have previously identified all or if not the vast majority of the items on my list and would like to confirm this by visiting Noel Street again. All this equipment exists and is locatable and it belongs to Lombard. Should I arrange access via yourself?”

Again, Lombard was unhappy with this response and on 24 August 2011 at 12.43 hours wrote as follows:

“Due to time restraints we need to move this case on as quickly as possible therefore as we were not able to agree an unconditional sale of the assets that we have been able to identify within the timeline outlined with yourselves. (provided with my Excel sheet).

We are now reviewing the option and will look to peruse other avenues to dispose of our assets, please accept this as notice to that effect.”

Mr Boote immediately responded at 13.04 hours that:

“This is not acceptable as we have an agreement, please respond to my previous e-mail.”

However, Lombard denied at 13.22 hours that any contract had been concluded, stating:

“You did not respond to my terms within the 5 pm deadline. You responded stating different terms to what we had agreed therefore nullifying our agreement.”

Mr Woolf replied at 13.48 hours:

“Your e-mail of 19^th August accepted our offer. Your mail of 22^nd is therefore post contract and cannot operate to ‘nullify’ the agreement. I am pleased to note that you accept that an agreement was indeed made.

Please reply to Richard's mail so that we can move forward to completion.”

Lombard’s response, however, at 16.31 hours, made clear its position that there was no contract between the parties:

“As you are aware, I did not receive an order confirming that the terms were agreeable and also did not receive confirmation of the invoice address to confirm your agreement to proceed, within the timescale stipulated in our e-mails.

Further, as you have noted, there remains uncertainty over the exact nature of the equipment that remains at the premises and the condition of this. Whilst this uncertainty over the nature of the equipment available remains, we cannot agree a sale of anything as there is no clarity over what is available for sale.

Due to the above instances there is not and was not a contract formed. As a result we will not be concluding a sale.”

Further correspondence followed in which the parties maintained their respective positions, Air Studios insisting that a contract had been concluded while Lombard insisted that there was no such contract. Eventually by its solicitors' letter of 31 August 2011 Air Studios held Lombard in repudiation of the contract which it claimed to exist and indicated that it would seek damages.

There is an issue between the parties whether their exchanges after 19 August 2011 as set out above are relevant to the question whether a binding contract was concluded. Miss Windle for Lombard submits that these exchanges are relevant and support the conclusion that there was no contract, in particular because Air Studios failed to provide the confirmation of agreement sought by Lombard and instead sought to re-inspect the equipment and report to its board which, she submits, is not consistent with belief in a concluded contract. Miss Smith submits that if a binding contract was concluded on 19 August 2011 as she contends (and she accepts that if it was not concluded on that occasion, there was no contract concluded at any later time), events occurring after the contract was concluded cannot affect the existence of that contract. It appears to me that there is a force in this submission, but it is unnecessary to consider this matter further as, in my view, the exchanges after 19 August 2011 provide little or no support to Lombard’s case. Even leaving aside the question whether the parties' subjective understanding whether a binding contract had been concluded is relevant, the exchanges in my judgment are entirely consistent with such a contract and, in some instances, positively assert the existence of such a contract. It is understandable that, even if a contract had been concluded, Air Studios should be concerned about the possibility of damage to equipment at the hands of a new tenant, a point which Mr Howard acknowledged in his e-mail of 22 August 2011 referred to at [57] above, and that he should wish to check for himself what the position was.

In the event the equipment was sold by Lombard to Halo for the amount outstanding on the three lease agreements, while Halo also reached agreement with the liquidator to take over the premises and business of Future Post as a whole.

In the light of this account of the facts and the conclusions which I have indicated on the parties' detailed submissions as to the impact of their exchanges, I can now state my conclusions on the liability issues identified at [15] above.

A binding contract was concluded on 19 August 2011. Air Studios’ e-mail at 10.20 hours on that day (see [38] above) was not an offer capable of being accepted because it was expressed to be "subject to contract", but this qualification was removed by the clarification sent at 10.50 hours ([42] above), whereupon the offer was an offer capable of being accepted notwithstanding that it contemplated the execution of a further more formal document. Lombard’s own clarification sent at 11.08 hours ([45] above) referring to its standard terms and conditions was not a counter offer and did not change the basis on which the parties were negotiating, namely that Lombard would make a firm decision one way or the other whether to accept Air Studios’ offer and would notify its decision after midday, albeit that in the event of an acceptance, further formalities (not such as to prevent the conclusion of a binding contract) were contemplated. Lombard did then accept Air Studios’ offer by its e-mail of 15.08 hours ([48] above).

The terms of the contract were that Air Studios would purchase from Lombard the equipment identified in the three lease agreements “as is” for a price of £100,000 plus VAT, it being Air Studios’ responsibility to remove the equipment from the Noel Street premises at its risk and expense. The sale was of the console in the case of Agreement 394 and not merely of the software upgrades, and was for the equipment referred to in the leases and not merely the equipment which had been positively identified by Lombard as being present at the premises. This was the clear basis on which the parties had been negotiating since Lombard’s e-mail of 18 August 2011 inviting Air Studios to submit an offer ([28] above) and that position did not change. There were no standard terms and conditions forming part of the contract at this stage, although it was contemplated that there would in due course be a further formal contract which would contain such terms and conditions. In particular, it was common ground by the end of the trial that any contract did not include the Lombard terms and conditions, which although referred to were never agreed. Either there was a contract which did not include them (as I hold) or there was no contract at all.

To the extent that some matters had not been specifically discussed or agreed, such as when title or risk was to pass, or when the equipment would be collected, express agreement on these matters was not necessary in order for a binding contract to be concluded. These matters would be dealt with so far as necessary either pursuant to the provisions of the Sale of Goods Act 1979 or by the implication of a term that the equipment would be paid for and collected within a reasonable time (which, in the circumstances, would have been short).

The contract was not void for uncertainty. In particular, as already explained, the subject matter of the contract was certain as regards both the equipment to be sold and the fact that in the case of Agreement 394 the sale was of the console and not merely the software upgrades. In theory this could have created a problem for Lombard, if it turned out that some of the items covered by Agreement 1367 were indeed not available, or because it had purported to sell a console to which it did not have title, but in practice I doubt whether either of these matters would have made any real difference. Mr Boote had inspected the premises and had been satisfied that the equipment in question (and certainly the equipment in which Air Studios was interested) was present, while the liquidator had no use for the console without the software and would almost certainly have allowed Air Studios to remove it.

It follows from the conclusions reached so far that Air Studios succeeds on liability. Lombard was in repudiation of the contract and Air Studios was entitled to terminate the contract and claim damages, which it duly did.

Air Studios’ pleaded claim for damages consisted of two elements. The first was the difference between the contract price of £100,000 and the estimated cost of purchasing replacement equipment of the same specification, although in new and not second-hand condition. This cost was pleaded as being £420,417.45, which figure was increased to £505,810 in accordance with the single expert report of Mr Marriott (which, as I understand it, represents the price excluding VAT of the nearest available equivalent new equipment bearing in mind that at least some of the equipment has been superseded by later versions), resulting in a damages claim of £405,810. Acquisition of new equipment was said to be necessary because second-hand goods of the same specification were not available for Air Studios to acquire. The second element, which was not quantified, nor was it pursued at trial, consisted of damages “to reflect the lost opportunity for the claimant to earn profits from the use of the equipment assets as a film, television and audio post-production facility" until such time as Air Studios obtained replacement equipment.

At trial an alternative case was developed without objection, consisting of the difference between the contract price of £100,000 and the estimated cost of purchasing equivalent, though not identical, replacement second-hand equipment. The cost of such equipment was said to be £140,735 in accordance with Mr Marriott’s report, resulting in a damages claim of £40,735.

Lombard, however, submits that Air Studios suffered no loss (or has failed to prove that it did), for (broadly speaking) three reasons:

Although there was some reference in the evidence to the possibility (but no more than that) of the equipment having suffered water damage, neither party suggested that this was relevant to the assessment of damages. I proceed on the basis, therefore, that the equipment, sold “as is”, was in reasonable condition for second-hand equipment and was capable of carrying out its intended functions.

It was Air Studios’ intention to use the Gemini console, which so far as it was concerned was by far the most important item of the equipment, to establish a post-production dubbing facility. This would have represented a new venture for Air Studios, which naturally Mr Boote and Mr Woolf hoped would be profitable. They would not otherwise have contemplated acquiring the equipment. However, as Mr Boote acknowledged in evidence, Air Studios had not got as far as preparing a business plan for this proposed new venture or investigating in any detail the costs likely to be involved, and its existing business at this time was not profitable. Further the Gemini console, even with the latest software upgrades, was not the most up to date technology available, as it had been superseded in some respects by a later generation of hardware.

At the same time as negotiating with Lombard, Air Studios was also negotiating with a Mr David Turner who, it hoped, would head the proposed new business venture. In the event, however, Air Studios was not able to agree terms with Mr Turner who, when the equipment was eventually sold to Halo, decided to join Halo instead. At that point Air Studios had lost the equipment with which it hoped to establish its new business and had failed to secure the services of the man it had identified to take charge of this business. Its plans for a dubbing studio were therefore not pursued further. Although Mr Boote looked at the websites of some dealers in this kind of second-hand equipment, he did not make contact with them to discuss his requirements for a replacement console. Nor did Air Studios even consider purchasing a new console.

In these circumstances it is impossible to say one way or the other whether the new business which Air Studios was hoping to establish would in fact have been profitable if the contract had been performed. Further, there is no evidence of actual attempts by Air Studios to obtain replacement equipment and therefore no evidence based on such actual attempts of what such equipment would have cost. Miss Windle submits that the fact that in the event Halo purchased the equipment for £64,297.34, the settlement amount outstanding under the leases, is evidence that this was the value of the equipment, but I do not accept this. Lombard’s sale to Halo was made in circumstances where the deal with Air Studios had just fallen through, Halo was in the course of taking over the Noel Street premises, and Lombard’s only concern was to obtain payment of the amount which it was owed. This provides no evidence of the actual value of the equipment or the price at which comparable equipment could have been obtained by Air Studios.

In the event the only evidence of what such equipment would have cost is contained in the expert evidence of Mr Marriott. Unfortunately that written evidence is not as clear as might have been hoped and no permission was given for Mr Marriott to give oral evidence at trial. This was perhaps understandable in a case where the amounts at stake are relatively low, and means that I must do the best I can with it.

In his report dated 7 September 2012 Mr Marriott stated that the cost of purchasing the nearest equivalent new equipment would have been £505,810. As to second-hand equipment, he provided a valuation on two bases. The first, which he described as “ex situ”, was on the basis that the assets were offered for sale for removal from the premises at the expense of the buyer. The second, which he described as “in situ”, was on the basis that they were offered for sale as a whole for use in their existing location, that is to say, that they would be bought by a buyer who would not need to remove them because he was also taking over the premises where they were located. He then concluded that the total “ex situ” value of the assets in question was £55,820, while the “in situ” value was £140,735. However, it appears that the question to which these valuations were directed was more concerned with the price which Lombard could have obtained for the equipment, depending on whether or not it was sold to a buyer who was also taking over the Noel Street premises, rather than the existence of an available market for the purchase of such second-hand equipment or the price which a buyer would have had to pay to purchase such equipment on any second-hand market which existed.

The question whether an available market did exist was dealt with by Mr Marriott as follows:

“There was an ‘available market’ for the assets in question, although in respect of the AMS Neve Gemini DFC system, this market was very limited. A like-for-like used replacement may not have been available, but a used system which could have done the same kind of work as the AMS Neve Gemini DFC system would likely have been sourceable within around three months. …

Our researches suggest that all the assets appear to have been reasonably available to buy and sell on the second hand market as at 24 August 2011, except for the AMS Neve Gemini DFC system (which is the main asset in terms of value) and its ‘upgrade and additions’ package.

The AMS Neve Gemini DFC system appears to have a limited market in that, if a used one becomes available, there are likely to be a reasonable number of interested buyers but the availability of a number of like-for-like used replacement systems at any one time is not certain.

We have no evidence that a like-for-like used replacement was available on or around 24 August 2011, although we have concluded that a system capable of substantially similar functions would have been sourceable within a matter of say three months with the assistance of specialist dealers/brokers.

So with regard to the AMS Neve Gemini DFC system, the judicial definition of an available market – having a reasonable number of buyers and sellers – may be met from time to time, but I am unable to demonstrate that it was met on 24 August 2011.”

Air Studios’ solicitors were understandably puzzled by the apparent discrepancy between the “in situ” and “ex situ” values given by Mr Marriott and requested him to provide clarification. In a letter dated 28 September 2012 Mr Marriott stated that:

“I can confirm that it is the ‘market price’ (‘in situ’) at £140,735, that is intended to represent the cost or price of acquiring the same or near equivalent assets on the open market as at 24^th August 2011. … I would explain ‘market price’ as being the delivered and installed replacement cost if one were to have acquired used goods of a substantially similar nature (in all likelihood from retailers and dealers).

‘Market value’ (‘ex situ’) is what we would have considered the realisation may have been if we had been instructed to value the goods for sale within a two month period at that time, without taking into account any hindsight regarding specific interested parties…”

Thus Mr Marriott confirmed, at any rate so far as his “ex situ” valuation of £55,820 was concerned, that this did indeed represent his view of the price for which the Lombard assets could have been sold on the basis that it would be the buyer’s responsibility to remove them from the premises.

He went on to explain that the difference between his “in situ” and “ex situ” values “is not merely the cost of relocation to a nearby premises, but the difference between what an end user who is willing to purchase, would have had to pay for such goods from whatever sources are usually available (including the cost of delivery, installation/set-up and commissioning), rather than what the goods could be sold for in a limited time period on a break-up basis (‘ex situ’).”

With respect, I do not find this evidence at all clear, and it may well be that what is said in the clarifying letter is not entirely consistent with the contents of the initial expert report. However, Mr Marriott did reiterate his opinion that “a truly comparable console may not have been available at the time”.

This being the available evidence, I consider next the applicable legal principles.

It is common ground that the legal framework for the assessment of damages is as set out in section 51 of the Sale of Goods Act 1979:

“(1)

Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery.

(2)

The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.

(3)

Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.”

Accordingly the first question to be determined is whether there was an available market for the goods in question. That contains within it two sub-issues. First, it is necessary to ascertain what is meant by “the goods in question” in the context of this case. Second, the question is whether there was “an available market” for those goods.

Miss Smith for Air Studios submits that there was no available market either for a second-hand console or for a package consisting of all of the equipment to be purchased second-hand, but that there was an available market for the purchase of new equipment which is the relevant market for the purpose of section 51(3). In my judgment, however, at any rate on the facts of this case, there is a material distinction between new and second-hand equipment, such that new equipment cannot be regarded as comprising or being equivalent to “the goods in question”, which were second-hand goods. I therefore reject the submission that damages can be awarded by reference to the price of new goods pursuant to section 51(3). I consider below whether such damages can still be recovered pursuant to section 51(2).

In the light of Mr Marriott’s evidence it is clear that there was no available market for “the goods in question” if that expression is limited to second-hand goods of the precise contractual specification. He confirms that there was no ready availability of an AMS Neve Gemini DFC system either in August 2011 or at all. In my judgment, however, the meaning of “the goods in question” is not necessarily so limited and must be determined in the light of the rationale underlying the prima facie rule in section 51(3). That rationale is to provide a straightforward and readily applicable measure of damages which will enable the innocent party to be put in the same financial position as it would have been in if the contract had been performed, and which does not depend upon the action actually taken by the innocent party in deciding whether or how to purchase replacement goods. In the case of a sale of second-hand equipment where (as here) there is no reason to suppose that any importance at all was attached by the buyer to the particular manufacturer of the equipment, or the particular brand of the equipment, it seems to me that the availability of equivalent second-hand goods capable of performing the same functions in much the same way would constitute an available market for “the goods in question”. A buyer of such equivalent goods would be in the same financial position as if the contract had been performed.

In my view this conclusion is broadly in accordance with the reasoning in the well known case of The Elena d’Amico [1980] 1 Lloyd’s Rep 75. In that case Robert Goff J drew attention to the close relationship between principles of causation, mitigation and the assessment of damages by reference to an available market, and treated the statutory provisions in section 51 of the Sale of Goods Act 1979 (which are themselves derived from the common law) as comparable to the common law measure of damages applicable in time charter cases. He saw no difficulty in the concept of an available market for the chartering in of a substitute vessel. However, the application of that concept does not depend upon either the substitute vessel or the terms of the replacement charter being identical in every respect to the contract vessel or the repudiated charter. Similarly, and particularly in the case of second-hand goods, “the goods in question” for the purpose of section 51(3) need not necessarily be identical in every respect to the goods which were the subject of the sale.

However, even if what matters is the availability of a market for the purchase of equivalent (and not necessarily identical) second-hand equipment, it remains to consider whether such a market existed in or within a reasonable time of August 2011. The cases (summarised in Benjamin’s Sale of Goods, 8^th edition (2010), para 17-005) show that what must be established is a ready availability of willing sellers to supply goods of the relevant category, and that a reasonable degree of flexibility exists both as to time (for example, the substitute goods may be available not immediately but within a reasonable time) and place (the substitute goods may be available, not at the place where the contract goods ought to have been delivered, but at a reasonable distance). It is, however, of the essence of an "available market" that it should in fact be available to the innocent party so that the innocent party, who needs to decide what to do, can be confident that the goods it needs will be available for purchase within a reasonable time. Accordingly when the purchase of equivalent second-hand equipment is possible, but the supply is limited and likely to be possible only after a period of delay, it is a question of degree whether such availability is sufficient to satisfy the requirement for an available market.

In this case the evidence is that it is likely (which I take to mean more probable than not) that a system capable of substantially similar functions would have been sourceable within a matter of about three months with the assistance of specialist dealers or brokers. In my judgment, however, this falls short of constituting an available market within the meaning of section 51(3). Adapting the approach of Webster J in Shearson Lehman Hutton Inc v. Maclaine Watson & Co Ltd [1990] 1 Lloyds Rep 441, there was not a market in which sufficient traders were potentially in touch with each other so that a would-be buyer could be confident of being able to purchase appropriate replacement equipment within a reasonable time. A delay of several months after which it was probable, but no more than that, that suitable equivalent replacement equipment could be located for purchase does not amount to a reasonably available supply of the goods in question.

I would add that the relevant question in this regard is whether there was an available market in which Air Studios could have bought replacement equipment. There was no question, at any rate by 19 August 2011, of Air Studios taking over the Future Post premises in Noel Street, so that Mr Marriott’s “in situ” price as explained in his initial report is irrelevant, while to the extent if any that his “ex situ” price represented the price for which Lombard could have sold the equipment, that too is irrelevant save to the extent if any that it represents evidence of the price at which Air Studios could have bought replacement equipment on the market. I add also that in the context of a sale of a package of equipment of which the console formed by far the most significant element, it is not appropriate to distinguish between those lesser items of equipment for which there was an available market and the console for which there was not. It would in any event have been necessary on any replacement purchase to ensure that the various items of replaced equipment were compatible with each other, and sensible to purchase them as a package rather than piecemeal.

Accordingly the prima facie measure of damages under section 51(3) is not available in this case and damages must be measured by reference to section 51(2), which is of course the basic rule to which, when it applies, section 51(3) gives effect. Damages for non-delivery under section 51(2) when there is no available market are discussed in Benjamin, para 17-021 as follows (omitting citations in footnotes):

“The assessment must be made on the basis of the value of the contract goods at the time and place of the breach which may be ascertained by any relevant evidence, such as the cost of the nearest equivalent or a resale price, or the profits which the buyer would have made had he acquired the goods and manufactured them into other articles, as the seller knew that he intended to do.”

I would observe that the relevant principle of law, contained in section 51(2) itself, is that damages must consist of “the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract”. To say that this “must” be made on the basis of the value of the contract goods is no doubt generally correct, and will generally give effect to the statutory language, but it seems preferable to rely on the statutory language itself. How best to give effect to that language will depend on the facts of the particular case in circumstances where, ex hypothesi, there is no available market for the goods in question. All or any of the possibilities mentioned by Benjamin may need to be considered depending on the facts. However, it will be a question of fact rather than of law to determine how best to assess the estimated loss directly and naturally resulting in any particular case.

I therefore reject Miss Windle’s submission that as a matter of law, once it is determined that the section 51(3) measure does not apply, damages must consist of the loss of the profits which Air Studios would have earned from the use of the equipment, and that because Air Studios has failed to establish that its use of the equipment would have been profitable, no substantial damages can be recovered. This submission is based upon the judgment of Field J in M&J Marine Engineering Services Co Ltd v. Shipshore Ltd [2009] EWHC 2031 (Comm) at [30] where Field J found that there was no available market and held that “the measure of damages is prima facie SS’s loss of profit.” However, it is clear not only that this conclusion was specific to the facts of the case, but also that the loss of profit awarded consisted of the loss of profit on a particular sub-sale of the equipment at issue in that case. Loss of profit on a sub-sale of the goods in question may well be an appropriate measure of damages in some cases, but that is very different from awarding a continuing loss of profits from the use of profit earning goods in a business. The problems, both practical and principled, of adopting the latter approach are obvious.

As it is, it has not been proved one way or the other whether Air Studios’ proposed use of the equipment would have been profitable. It was deprived by Lombard’s breach of the opportunity to put that question to the test. If it had in fact purchased replacement equipment, whether new or second-hand, that actual purchase would have put it in the same position as if the contract had been performed and subject to any question of having acted unreasonably, and perhaps of betterment in the case of a substitute purchase of new equipment, would probably have represented the best available measure of damages giving effect to the principle in section 51(2).

The fact that Air Studios did not purchase replacement equipment, either new or second-hand, does not mean that it has suffered no loss. As Sir Murray Stuart-Smith said in Barry v. Davies (trading as Heathcote Ball & Co) [2000] 1 WLR 1962 at 1969, albeit by reference to section 51(3), “It is not necessary that the purchaser actually goes into the market and replaces the goods”. It does mean, however, that a judgment has to be exercised as to how best to give effect to the principle in section 51(2) without the benefit of seeing what steps the innocent party actually took with a view to mitigating the consequences of the breach.

In the present case I have no doubt that the damages should be assessed by reference to the cost of procuring the nearest equivalent goods. Undoubtedly that cost can provide an appropriate measure of damages and it is a question of fact whether the nearest equivalent goods are new equipment or second hand equipment. In either case, on the facts of the present case, the replacement equipment would not have been identical to the contract equipment. Replacement new equipment could have been purchased from the same manufacturer, and would therefore have been an updated version of the same equipment, while second-hand equipment is likely to have been from a different manufacturer although capable of performing substantially similar functions. Notwithstanding that replacement second-hand equipment would therefore have corresponded less closely than new equipment with the contract equipment, I consider that the award of damages by reference to the cost of replacement second hand equipment would compensate Air Studios for the estimated loss directly and naturally resulting, in the ordinary course of events, from Lombard’s breach, while to award damages by reference to the cost (not actually incurred) of new equipment would leave Air Studios materially better off. The purchase of such second-hand equipment would have been possible, albeit after a few months, and represented a much closer commercial equivalent to the purchase of the second-hand contract equipment than the purchase of new equipment would have done.

The question, therefore, is what would have been the cost of such replacement second-hand equipment, the relevant cost being the cost of purchasing such equipment on terms that it would be the buyer’s responsibility to collect the equipment from wherever it was located. It is here that Mr Marriott’s report is not as helpful as might have been wished. Taking his initial report by itself, it seems very surprising that the discrepancy between his “in situ” and “ex situ” values should be so large, but I would have considered that there is force in Miss Windle’s submission that the “in situ” value is irrelevant and that the only evidence of an “ex situ” value, albeit apparently focused more on the question of what Lombard could have obtained than on what Air Studios would have had to pay, was that the value of the assets in question was £55,820, which is less than the contract price.

However, Mr Marriott’s further evidence in his letter dated 28 September 2012, which presumably represents his final opinion, is that the figure of £140,735 represents “the cost or price of acquiring the same or near equivalent assets on the open market as at 24^th August 2011”. It is true that he goes on to describe this as “the delivered and installed replacement cost”, which is not precisely comparable with a contract pursuant to which Air Studios would have had the responsibility of collecting the equipment, but I accept Mr Woolf’s evidence that collection of the equipment would have been straightforward and would have cost next to nothing, while it was not put to the Air Studios witnesses (and there is no other evidence) that significant commissioning costs would have been incurred. Therefore I see no reason to make any deduction from the damages to take account of these factors. There is no evidence that, as a result of not having to collect the Lombard equipment, Air Studios avoided the incurring of any expenditure, and certainly none which can be quantified. It is true also that he describes this as an “in situ” price, which in his initial report appears to refer to a sale of the equipment installed in the Noel Street premises, but his explanation of what this represents appears to be different in his letter dated 28 September 2012.

I find, therefore, that the cost of purchasing the nearest equivalent second-hand equipment to the contract equipment would have been £140,735.

I would add that if I am wrong in my conclusion above that there was no available market for the equipment in question, so that in truth there was an available market for equivalent second-hand equipment, the measure of damages pursuant to section 51(3) would be the same as I have found it to be pursuant to section 51(2). It is not surprising that the application of the two sub-sections produces the same result as each sub-section reflects the same principle. On the contrary, it would be surprising if the result was very different according to which sub-section is in play.

Accordingly there will be judgment for Air Studios in the sum of £40,735, that being the difference between the contract price of £100,000 and the cost of obtaining the nearest equivalent second-hand equipment, together with interest.