Earl's Terrace Properties Ltd v Nilsson Design Ltd

This statement does not clearly identify the nature of the delay that occurred, what is meant by “ETPL’s project” and what part of that project was delayed, why ETPL’s funds were held in the project for a longer period as a result, what that holding period was and what it was that ultimately triggered the release of the funds from the project.

For the purposes of these issues, I conclude that I must decide the issues on the assumed basis that construction work would have been completed and the houses handed over to ETPL in a satisfactory state on 30 June 1998 whereas, in fact, that handover did not occur until 30 September 1999. The intervening 15 months is to be assumed as having been taken up in investigating and deciding upon the causes of the water penetration and in undertaking extensive, unsightly and noisy remedial work involving a long term solution to the waterproofing problems and the reinstatement of the damage caused by the penetration and the remedial work. Any commercial use of the houses and any sale was delayed by a 15-month period. This 15-month delay was caused by the 15-month period of remediation but it was not necessarily spanning the same 15-month period as the 15-month remediation period.

The construction and sale of the houses numbered 1, 3, 5 and 25 and the construction of the underground car park were not affected by this delay. The agreed statement of facts makes no mention as to whether or not the houses numbered 2, 4 and 12 -19 were affected by this delay but the claim is based on the total costs of the development including these properties even though these were not subject to the membrane, water penetration and remedial work that grounds the claim for direct costs.

It follows that the claim for the recovery of holding costs for these additional properties is based on an allegation that the recovery of the development costs associated with them houses was delayed by the water penetration remedial works at the adjacent houses although these additional houses were not themselves subject to such remedial works.

Direct building and remedial costs. There are four heads of such loss: the direct remedial costs of executing the remedial scheme devised by Nilsson and undertaken by Charter at an approximate cost of £890,000; remedial electrical and mechanical work at an approximate cost of £17,700; (iii) garden works at an approximate cost of £179,000; and (iv) the cost of engaging professionals to design and supervise the remedial works including architectural consultants, landscape designers, structural engineers and quantity surveyors at an approximate cost of £233,000.

Compensation. There are three heads of such loss: the storage costs of kitchen units that were to be installed at an approximate cost of £2,000; compensation to adjacent tenants for nuisance claims arising out of the carrying out of the remedial works at an approximate cost of £16,300 and the costs of the delay and disruption that the mechanical and electrical contractor directly contracted to ETPL incurred during the remedial works at an approximate cost of £568,000.

Holding costs. This claim is the subject of these two issues and is currently approximately £5.981m.

ETPL was a development company, established for the specific purpose of developing the properties.

The project was a commercial development. Nilsson at all times knew that the project was funded as to the costs of purchase and development by Earl’s Terrace.

Any delay to completion of the project would result in funds being held in the project for longer than they would otherwise be. Nilsson at all times also knew that any delay to completion of the project would result in the loss of use of those funds.

The development project was high-risk. Any capital invested in the project by ETPL was similarly at risk, while the cost of commercial borrowing for a company such as ETPL would reflect the risks to the lender.

Vastint has lent monies, and may make further loans of such amounts by way of Development Funding as may be required for the development and refurbishment of Earl’s Terrace. It is the intention that the principal amounts of the Development Funding will not at any time exceed the amounts outstanding at that time under the initial Funding Draw Down Facility.

The Development Funding is to carry interest at 10 per cent accruing annually from inception or as appropriate from the date of such further loans as may be made, payable gross by ETPL subject to the agreement of the Inspector of Foreign Dividends, or otherwise net after deduction of tax at basic rate.

ETPL has the right to attribute any repayments to Vastint first against capital and then as to interest.

by applying the interest rate of LIBOR plus 2 per cent claimed at paragraph 51.3(5) of the particulars of claim [set out at paragraph 14(3) (e) above] to the funds that it had invested in the project for such period of delay or

by applying an interest rate which reflects the actual cost to ETPL of borrowing the funds that it had invested in the project for such period of delay?

ETPL has pleaded that the additional holding costs on which its claim is based represents losses arising naturally and in the ordinary course of events as a result of Nilsson’s breaches of contract and negligence. By implication, ETPL also alleges that holding costs fall within the scope of Nilsson’s alleged duty owed to ETPL. Nilsson, in its defence, contends that it only owed limited architectural duties to ETPL that did not include the production of, or advice about, any of the relevant membrane details or any inspection or supervision of Charter’ s workmanship involved in the installation of the membrane. Nilsson accepts that it played a limited role in identifying the causes of the water penetration but denies any more extensive role and asserts that it performed its role reasonably and with reasonable skill and care.

Thus, there is an unresolved dispute as to the extent and scope of Nilsson’s duty but, for the purposes of these issues and given the facts to be assumed in deciding them, Nilsson and Charter both accept that the assumed facts disclose that ETPL is, in principle, entitled to be compensated for any financial losses that it has suffered as a result in the sale of an affected house that can be proved. I will, therefore, assume that the nature of Nilsson’s assumed terms of engagement includes within their scope responsibility for the holding loss being claimed by ETPL.

The issues arise as a result of five controversial features of ETPL’s claim. The first controversial feature is that ETPL is claiming, as a consequence of the assumed negligent design and supervision, that its development costs were held in the project for a period of 15 months longer than would have been the case but for that assumed negligence without seeking to show that the reason for that delay was the need to postpone the sale of the affected houses and the recovery of the proceeds of sale. As a concomitant of this, Nilsson contends that ETPL will be unable to prove, on the basis of the case it has pleaded and proposes to advance, that the so-called development costs were held in the project at all or for longer than they would otherwise have been.

The second controversial feature of ETPL’s claim is that ETPL did not itself advance all, or at least the substantial part of, the development costs and is not, or at least is largely not, having to finance any borrowing or lending of that advance. Therefore, any additional holding costs incurred as a result of the delay were not incurred or lost by ETPL so that, it is argued, these may not be claimed or recovered by ETPL.

The third controversial feature of ETPL’s claim is that such holding costs as it directly incurred are those arising from the loans made by Vastint under the Construction Credit agreement. These loans were in part interest free, although subject to a provision allowing ETPL and Vastint to agree that interest should be paid and to the rate of interest, and in part at a higher than normal rate of 10 per cent. However, the loans were not unduly soft since, additionally, they were repayable on demand and were secured by way of a fixed and floating charge over ETPL’s assets which were largely if not entirely the Earl’s Terrace development.

The fourth controversial feature of ETPL’s claim is that the interest claimed is notional in the sense that no-one has been charged LIBOR + 2 per cent. ETPL is using that basis of calculation as representing a reasonable basis of assessing the loss of the use of its holding costs for a 15-month period since its actual loss would be difficult to ascertain and potentially unreasonable in its amount.

The fifth controversial feature of ETPL’s claim arises because of the unusual way in which market in luxurious, top of the price range London housing stock fluctuated in the period from 1997 to 2000. Nilsson contends that that market had slumped and was stagnant in 1997 and 1998 so that ETPL would not have attempted to sell, and would have been unsuccessful in selling, the bulk of the houses in that period unless it had taken a huge and unacceptable reduction in the asking prices that it proposed to seek. Thereafter, the market recovered very rapidly so that ETPL was able to sell the houses in and after 1999 at significantly increased levels to those available in 1998. Thus, the sales would have been delayed in any event until the time they occurred and any delay caused by Nilsson’s assumed negligence has been to ETPL’s advantage since it was able, in consequence, to sell the houses at a significantly enhanced price compared to those obtainable 15 months earlier.

It is as a result of all these features of ETPL’s claims that Nilsson and Charter contend that the claimed loss is irrecoverable since, in reality: (1) no loss occurred at all; or (2) as an alternative, no loss was incurred by ETPL; or (3) as a further alternative the claimed loss is irrecoverable as being a claim for interest as damages; or (4) as a yet further alternative the claimed loss was eliminated or greatly reduced in size since ETPL must give credit for its increased recovery of sale proceeds following the delayed sales and this necessary credit would eliminate or significantly reduce ETPL’s loss represented by its claimed holding costs.

The loss in question is described in the particulars of claim as being “holding costs”. This is something of a misnomer. The loss that is referred to arose because the remedial work held up and delayed the completion of the project and the start of ETPL’s making commercial use of the property. The effect of this delay was twofold: it prolonged the time over which the money used to fund the development had to be borrowed which, in turn, increased the interest that had to be paid for such borrowings and it delayed the recovery of those funds so that they could not be put to an alternative and profitable commercial use. The reason why these delays occurred is not pleaded. This reason could have been that the delay itself delayed the recovery of the proceeds of sale of the property. It could also have been that replacement sources of funds were to be obtained, at no cost to ETPL, which were dependent upon the successful completion of the development.

These losses could not have been avoided since the loan agreement provided that all loans from Vastint to ETPL for the purpose of funding the development were to be secured on the development by way of a fixed and floating charge over ETPL’s assets until they were repaid. Thus, the losses would continue until these development funds had been replaced and the security released.

ETPL’s additional potential losses, which are not claimed or relied on and may not have been incurred, might also have included such heads of loss as the loss of rental or other income derived from the properties in the period of delay, or a reduced recovery from the sale of the properties because of a fall in their value in the same period or damages payable to purchasers of the properties as a result of delayed completion or delay in providing vacant possession caused by the delays in question. Had these losses been incurred and claimed, further additional difficult questions as to their recoverability in law would undoubtedly have arisen.

It is to be noted that the period of delay in relation to all these actual or potential losses is not the same. Although the length of the period is the same - 15 months - the start and end dates differ. Thus, in relation to the claims based on the delayed return of funds locked into the development, the start date of the period of the claim would be the delayed date or dates upon which the proceeds of sale were obtained by ETPL compared with the earlier dates upon which they would otherwise have been recovered. The marketing campaign needed to sell the houses could not have started in earnest until the houses had been completed and, in consequence, their proceeds of sale would not have been achieved on the completion of the development but on various dates after completion and the subsequent marketing campaign for the houses. Thus, the period of delay would not be the same as, and would start later than, the 15-month remedial period for the defects. However, if there had been any claim based on ETPL being kept from a commercial use of the houses, for example because of an inability to let them, such a period of delay would equate to the period during which the remedial works were carried out since the premises could have been let as soon as that period had ended.

Nilsson asserts that the issues that I have to decide must proceed on the basis that ETPL does not intend to establish as a fact that its recovery of the development costs was delayed by 15 months and is instead proceeding on the basis that ETPL may base its claim on its loss of the use of the houses for that period. Thus, it is to be assumed that ETPL will not attempt to prove that the houses could and would have been sold 15 months earlier than they were sold nor that the proceeds of sale were paid to ETPL by the purchasers 15 months later than the sale proceeds would otherwise have been paid to ETPL.

Nilsson’s approach to the issues would not appear to be justified since ETPL, in its submissions, contended that the loss it was claiming was similar to the recoverable loss that may be claimed by the owner of a chattel or of a building as compensation for being deprived of the opportunity to use or occupy the chattel or building in question. ETPL also contended in is pleading that ETP was delayed by 15 months in recovering the development funds.

I must also consider whether ETPL must establish that it was the party that incurred either or both of the types of loss referred to in the pleadings if it is to recover damages or whether it is sufficient for it to show that loss of that type was incurred by either it or Vastint. Finally, I must consider whether ETPL’s recoverable loss must be proved directly or whether it is sufficient for ETPL to show what foreseeable loss might have been incurred by a developer faced with the assumed duties and breaches and by adopting that notional loss as its own.

It is only if ETPL successfully surmounts all these hurdles that I must consider whether, if it is shown that the purchase price of the houses rose in the intervening 15 months, Nilsson and Charter are entitled to take advantage of that price rise by having the damages otherwise payable reduced by a credit equal to the increase in the proceeds of sale resulting from the rise in sale prices in the 15 months between June 1998 and September 1999.

ETPL contended that its claimed consequential loss was an income loss being the loss resulting from its capital lying idle for 15 months. This loss was the loss of its opportunity to use the money commercially elsewhere in that period. This loss arose whether or not the money was borrowed and whether or not it had been funded by Vastint since, even if Vastint was the source of the funds, the loss is taken to have been that of ETPL as the party to whom Nilsson owed its contractual duties.

Nilsson contended that the only consequential loss that ETPL is entitled to recover is loss directly incurred by ETPL in funding the project during the period of delay. Nilsson used the term ‘special damages’ to describe this recoverable loss rather than the term used by ETPL to describe the loss it was claiming, namely ‘consequential loss’. Thus, Nilsson contended, ETPL’s recovery was confined. It must first plead and prove that the house sales were delayed by the 15-month remedial period and then prove what additional interest ETPL had been incurred in that period in borrowing the development funds. Furthermore, it is not entitled to recover any direct loss incurred by Vastint since such loss is extraneous to the contractual relationship between Nilsson and ETPL. Moreover, the loss actually claimed by ETPL is equivalent to a claim for interest, a claim rarely allowed in law and certainly not allowed in the circumstances of this case. Charter supported these submissions with brief but illuminating supplementary written and oral submissions to the same effect.

ETPL responded by contending that loss of opportunity and loss of use were separate and distinct types of loss to loss caused by additional funding costs and it was this loss, whose recoverability was denied by Nilsson, that was being claimed. It mattered not that the loss was wholly or partially that of Vastint since the ultimate source of the funds was immaterial in law. Loss of use claims are traditionally quantified by reference to interest recoverable on the funds tied up for the relevant period as an exception to the usual principle that interest is not claimable as damages.

ETPL describes its claim as being one for consequential loss. This term is usually used to describe loss that has not arisen directly, usually the repair costs of the consequences of physical damage, and is also usually economic loss and usually includes such heads of damage as loss of profit, loss of interest and loss of income. Such loss is often irrecoverable because it is regarded as being too remote or unforeseeable or not within the scope of the defendant’s duty that founded the claim. This irrecoverability is often based on the reluctance of a court to allow recovery of pure economic loss where no physical damage has been caused since there is always concern to keep the amount of recoverable damages within proportionate bounds. ETPL’s claimed loss is properly described as consequential.

Nilsson describes the loss being claimed by ETPL as being special damages. Such damages are usually the direct but quantifiable damages additionally recoverable when general damages are claimed. General damages claims include those for personal injury, loss of employment rights, acts or discrimination, harassment, illegal eviction, defamation and various kinds of infringement of personal freedoms. Special damages can be both physical and economic. It is, therefore, a misnomer to describe ETPL’s claims as being for special damages.

Indirect damages are those which are only loosely connected with the damage in question and the expression is usually used in an insurance context to seek to limit the extent of insurance cover. The damage can be physical or economic. ETPL’s claims might or might not be for indirect damage but since they are not being pursued in an insurance context, it is not necessary to consider further this potential way of describing them.

Overall, the law seeks to define the boundary between recoverable and irrecoverable loss by loosely drawn principles of recovery. The loss must be foreseeable and within the scope of the defendant’s duty, it must have been caused by the breach in question, it must not be too remote, it must not, where negligent acts or omissions are in question, amount to pure economic loss and it must be fair and reasonable to impose a duty to avoid that loss. These rules or principles must be imposed, however, in a way that allows recovery for loss actually incurred and does not allow recovery where there has been no, or no discernible loss. This creates further difficulties in some cases since it is sometimes unclear whether the claim relates to a loss which is sufficiently discernible or quantifiable in monetary terms to allow recovery.

Loss of use of development

Nilsson contended that ETPL’s loss claimed in this case is, in reality, ETPL’s loss resulting from the delayed return of the development costs resulting from the delayed receipt of the proceeds of sale. Such a loss is, and can only be, the additional loan interest payable by ETPL in the period of delay between the date the proceeds of sale should have been received but for the delay caused by the remedial work and the actual date of receipt. However, such a claim would necessitate ETPL in pleading and proving that it would have attempted to sell the houses, that it could have sold the houses on an earlier date than it did and that it would then have used the proceeds of sale to discharge the borrowings advanced to fund the development. If necessary, ETPL could establish that it had lost the chance of earlier sales and its claims assessed on that basis. However, Nilsson is not attempting to plead or prove any of these essential factual foundations of its claim.

In support of these contentions, Nilsson relied on Blue Circle Industries v Ministry of Defence⁴ where the defendant had contaminated the claimant’s land with radioactive material. The claimant had not been informed of this problem and negotiated to sell the site whilst still unaware of it. When the problem came to light, the prospective purchaser broke off negotiations to buy the land. The land was then decontaminated and ultimately sold nearly two years after the negotiations had been broken off at a significantly reduced price because the market had dropped. The Court of Appeal affirmed an award of damages, assessed on the same basis as a negligence or nuisance claim albeit that the claim was for breach of statutory duty arising out of the Nuclear Installations Act 1965. That loss was loss arising from the damage to the land caused by the contamination. Such loss could include the loss arising from the difference in the market value of the uncontaminated land at the earlier and later dates since that loss had resulted from the physical contamination of the land.

The basis of this decision was that the claimant was entitled to be put into the position that it would have been in if the contamination had not occurred, that is that it would have had the opportunity to sell the land on a date nearly two years earlier than it was able to take that opportunity. Thus, Nilsson contends, ETPL can only recover a loss directly caused by the delay in question if it can show that that loss caused it to sell the properties later than it would otherwise have done. ETPL’s riposte is to the effect that that contention is acceptable but it does not lead to the conclusion that the only losses that ETPL may recover are those that can be proved to be directly linked to delayed sales of the properties, albeit that such losses would be recoverable. ETPL is entitled to recover for the entirety of its directly foreseeable losses resulting from delayed completion that can include loss of the commercial use of the properties and of monies advanced to fund the development in addition to any increased costs of borrowing.

ETPL’s contentions are supported by a number of cases involving loss of the use of a commercial chattel, delayed delivery of commercial goods and the loss of use of property caused by delayed completion of its construction or of remedial works being carried on within it. These contentions were succinctly encapsulated in this passage cited from McGregor on Damages:⁵

“Where a breach of contract consists of a failure to deliver property on time or at all, the plaintiff may suffer pecuniary loss by being deprived of the use of the property during the period of delay ... Similarly, where the breach of contract consists in a delivery of a defective property, the plaintiff may be deprived of its use while the defect is being remedied... This loss of use is most likely to result in a head of claim in damages when it results in loss of business profits to the plaintiff… If no such losses have been incurred or if the court refuses their recovery on the ground of remoteness, then a sum calculated by way of interest upon the property, during the period the plaintiff is deprived of it, ... may be allowed... In the absence of any such positive recoveries, general loss of use of property has sometimes compensated by an a ward of interest as damages.”⁶

⁵

Cited from paragraphs 53 - 54 of the 17th edition. The corresponding citation from the 18th edition, published since the conclusion of the argument in this case, is to the same effect.

⁶

This citation is supported, in the text or by authorities cited in argument, by a line of authority which includes: British Columbia Saw Mill v Nettleship (1868) LR 3 CP 499, Court of Common Pleas; Liesbosh v Edison [1933] AC 449 465, HL; Heskel v Continental Express [1950] 1 All ER 1033, Devlin J; and Brandeis Ltd v Western Transport [1981] QB 864, CA.

It follows that the approach contended for by Nilsson is unduly restrictive and that any direct and foreseeable loss caused by the damage and consequent delayed completion of the houses is recoverable. However, it is necessary for there to be loss caused by the delay. The mere fact that the development was delayed is not sufficient since it is possible, although unlikely, that the developer did not incurred any loss although the houses were completed late. Thus, ETPL’s pleaded loss is, in principle, recoverable since it is premised on “... the defects, the investigation and subsequent remedial work ... which caused a delay to ETPL’s project ... and resulted in funds being held in the project for a longer period than they would otherwise have been”.

ETPL cannot however, succeed, as Nilsson contended it was seeking to succeed, merely on the basis of the fact of a delayed completion of the development. ETPL can succeed in principle, however, if it can show that there was a direct causal connection between the delay caused by the investigation of the defects and consequent remedial work and the funds being held longer in the project than they would otherwise have been, whatever the reason for the delayed unlocking of the funds might have been. It does not matter why the funds were locked into the development for a longer than anticipated period, whether it be because of a delayed receipt of the proceeds of sale, or of the delayed reimbursement or recoupment from another source or for whatever other reason. What ETPL must however establish is that the delayed completion directly caused the delayed unlocking of funds.

ETPL does not, on its presently pleaded case, particularise how and why the funds were locked into the development longer than anticipated other than merely asserting that this delayed release of funds resulted from the delayed completion of the development. What ETPL must show is the causal connection between the two delays, that is between the delayed completion of the development and the delayed unlocking of the funds. This will necessitate it in showing that it would have received back or recovered the £48m development costs it sunk into the development 15 months earlier than it would otherwise have done but for the delay caused by the remedial works.

Given the absence of particularisation as to how the funding was provided for, I must proceed on the basis that there were three possible sources of funding for the development funds in unspecified proportions. These were: (1) from the initial funding draw down facility provided for in the Credit Financing Agreement of up to £20m, or as further increased by negotiation, which was secured on the development. These funds carried no interest subject to a contrary mutual agreement reached between Vastint and ETPL but were repayable on demand; (2) from the development funding facility also provided for in the Construction Credit Agreement which carried interest at 10 per cent accruing annually secured on the development and repayable on demand; and (3) from other unspecified sources whether ETPL’s own resources or an alternative funding source by way of gift or loan on unspecified terms.

Nilsson and Charter contended that the only loss that could be recovered was additional interest payable by ETPL since only its own loss was recoverable in law. Thus, no loss associated with the first source of funding, via the interest-free draw down facility, was recoverable since any loss that had resulted in the delayed unlocking of these funds was attributable to Vastint and not ETPL. To allow recovery for these losses would be to allow ETPL to pierce the corporate veil and to recover Vastint’s losses rather than its own. ETPL contended that the credit arrangement was an inter-company financing arrangement between related companies, since ETPL was wholly owned by a company which was in turn wholly owned by Vastint. Moreover, ETPL was required to secure the whole loan on the development which would preclude its repayment until the development was sold and it also had to make commercial provision for the possibility of the loan being called in on demand, as provided for in the Construction Credit Agreement. Finally, the agreement envisaged that ETPL and Vastint might reach a subsequent agreement whereby the loan would be subject to interest payments to be made by ETPL to Vastint. The loan was not, therefore, entirely at Vastint’s cost albeit that the actual cost to ETPL was neither defined nor readily definable.

The head of claim is, therefore, expressed in either of two ways. First, it is claimed as a loss incurred by Vastint and represents the loss Vastint has suffered from the loss of the use of its funds for the period in question. Secondly, it is claimed as a loss incurred by ETPL for the loss of the use of the same funds which are to be considered as being ETPL’s own funds and thirdly it is claimed by way of a general claim for damages representing the notional cost to ETPL for having to make contingent commercial arrangements to cover the possibility of the loan being reclaimed or not recovered.

The starting point in considering the claim based on Vastint’s loss used to be that this loss is irrecoverable by ETPL since English law ordinarily requires the loss claimed by and payable to a claimant to be its own loss. However, this general principle is now susceptible to so many exceptions that it is doubtful whether it is any longer supportable as representing a statement of the general law. Instead, a court’s starting point is to consider whether the loss was incurred by the claimant and, if not, whether the contract in question contemplated or provided that any breach would incur the contract breaker in a liability for losses suffered by a third party, whether such losses fell within the scope of any duty that was broken, whether the claimant has some equitable or other duty (for example by way of a duty imposed by principles of subrogation) to pursue and recover the loss on behalf of another or whether there is some other particular basis recognised by the law that allows for the claimant’s recovery of another’s loss.

The claimant relies on the principle that loss incurred by another is recoverable if it was in the contemplation of the parties that such loss was within the scope of Nilsson’s contract or duty. It contends that the agreed scope of Nilsson’s duty must be taken to include the additional funding costs and the losses accruing from any delay in the recovery of funding costs arising from delay to the completion of the development caused by the need to rectify its own design and supervision defaults. The scope of Nilsson’s duty, I must assume, included the fact that the engagement was in connection with a speculative commercial development being undertaken by its client who was a special vehicle company set up solely for that purpose. Any capital invested in the project was at risk and any borrowing for purposes of the project would be a cost which would reflect that risk. Furthermore, any development delay would result in funds being held in the project longer than they otherwise be held in it and would result in the loss of the use of those funds.

It is clear from this summary that funding costs and other losses arising from a delayed return of capital locked into the project fell within Nilsson’s scope of duty irrespective of whether it was Nilsson directly or Nilsson via a related commercial entity that incurred the loss, particularly if the borrowings were secured on ETPL’s property which it was developing. Assuming that the claim is one that would be recoverable by ETPL if it had incurred the loss in question, these costs and losses fall within the principle that I formulated on the basis of the authorities as then prevailing in John Harris Partnership (a firm) v Groveworld Limited.⁷ In that case, a joint venture commercial development had been undertaken and a claim was then made against the architect for damages for breach of a contract for architectural services in connection with a building contract by one of the partners who would only itself be liable to fund 45 per cent of the costs being claimed as damages. The architects contended that 55 per cent of the claimed loss could not be recovered since this had been incurred by the a third party joint venture partner of the claimant. I concluded that the entire loss could be recovered by the claimant, stating:

“If the loss [ie 55 per cent of the claim] is irrecoverable because … [the claimant] has not suffered loss, recovery may still be obtained from [the architect] if the following can be established:

1.

The nature or terms of [the architect’s] contract with [the claimant] are such that [the claimant] can be taken to have contracted with [the architect] on the basis that [the third party’s] loss would be recoverable from [the architect] at the suit of [the claimant]

2.

[The claimant] has an equitable obligation to peruse [the architect] for the loss caused to [the third party] by [the architect] and a duty to account to [the third party] for any recovery.

3.

The Linden Gardens exception, which provides [the claimant] with an entitlement to pursue [the architect] for [the third party’s] loss, is one which is not confined to building contracts but can extend to contracts involving the provision of professional services.”

⁷

Cited in argument using the truncated report in (1999) CILL 1485. A full report is contained in an established set of law reports: X Con LR (2000) Y.

The conclusion to be drawn from these authorities is that delay in completing a commercial development gives rise to a claim for losses caused by there having been a period of delay in the completion of the development. Such losses can include the loss arising from the loss of use of capital and financing funds locked into the development during the period of delay. The claimant developer must show that he did lose the use of the funds in the sense that he must show that he would have put the funds to commercial use by investment, by reducing overdraft or other borrowing costs or by investing in the business to obtain capital development. He must, in other words, provide evidence that there was a release of funds generated by the completion of the development and that the actual date of release and a delay in release was causally linked at least in general terms to the defendant’s breach of contract and duty. He must also show what he would have done with the funds during the delay period had they been released earlier.

If the claimant can establish that he has lost the opportunity to use the funds for a commercial purpose but he cannot establish the precise loss that arose or cannot readily quantify it, the claimant may then quantify the loss by reference to a reasonable rate of return that could have been achieved from the funds. It will, of course, have to be established what that rate might be. Obvious guidance would be obtained by ascertaining what rate of interest could have been obtained by depositing the funds so as to earn a commercial rate of interest or by lending the money on relatively short term terms. Such an assessment is permitted because the law allows an approximation of the loss to be made where a claimant can prove that he had been prevented from using funds for a commercial purpose as a result of the defendant’s breach but where he cannot reasonably or readily identify the nature or extent of that loss.

Nilsson and Charter sought to counter this approach to the loss as claimed and quantified by ETPL in two ways. Firstly, they relied on statements in a number of authorities to the effect that special damages arising from a delay causing the loss of an opportunity to use property or money must be specially pleaded and proved to be recoverable. Thus, in the Blue Circle case,²² Chadwick LJ stated:

“ … in principle the plaintiffs would be entitled to compensation for loss of the use of the money which they would have received in April 1993 if the sale to Sun had gone through, this element would nee to be claimed, and proved, as special damage. No special damage was claimed in respect of the loss of the sale proceeds, and there is no basis upon which the judge could have assessed compensation for that element of loss.”²³

See paragraph 61, endnote 4 supra.

At page 316.

This statement supports the conclusion that I have already reached that a claimant must prove that it lost the use of the money in question and must establish that it would have been put to commercial use had the claimant had the use of it in the time in question. However, if the statement is intended to lay down an absolute rule that a claimant can only recover specific and ascertainable loss where it can establish the loss of commercial use of money or land, the statement was neither necessary for the case in issue nor in line with earlier authorities. In the Blue Circle case, no loss of use of any kind was established so that there was no basis for the assessment of compensation. Had the claimant established that it would have banked the sale proceeds or would have used them for a useful commercial purpose but without establishing the precise loss that would have occurred, the authorities that I have already cited establish that a loss of interest assessment is then permitted.

Both Nilsson and Charter also sought to show that, in principle, interest is never recoverable as damages so that the claim in question was irrecoverable. Instead, a party can only recover, where lost use of money is the basis of a claim, the precisely quantified loss that it has incurred. On analysis, this is a different way of putting the basic point made by Nilsson that I have already dealt with. The answer to it is that no damages are recoverable if no loss of any kind can be established. If it can be established that a party lost the opportunity to make commercial use of the money in question but cannot precisely quantify that loss, it is in principle acceptable for a claimant to quantify that loss by reference to a reasonable return that it could have earned by placing the money on deposit and then collecting a reasonable commercial rate of interest over the relevant period of delay.

Nilsson and Charter finally contended that, for the interest element of ETPL’s claim, being the part of the loan from Vastint on which it had to pay interest, it was unable to show that it had had to pay Vastint a rate of interest as claimed, namely LIBOR plus 2 per cent. In fact, the rate was a higher rate of 10 per cent. ETPL responds in two ways. First, the rate of 10 per cent was not foreseeable since it was higher than could reasonably have been contemplated. In such circumstances, a claimant is not deprived of all recovery but only of that part of the interest that was paid that was unforeseeable. Thus, a foreseeable rate of interest, being a commercially reasonable rate, is recoverable. Secondly, ETPL incurred considerable commercial loss in relation to the part of the loan not covered by a defined rate of interest since that funding was secured on the development and on ETPL’s other assets, ETPL had to make provision for the fact that the loan was repayable on demand and also was susceptible to a possible subsequent agreement to convert the soft loan into an interest bearing loan. The costs of these additional commercial detriments cannot be readily quantified so that a reasonable basis for quantification would be to take a reasonable commercial rate of interest over the relevant period.

The overall conclusion is that ETPL has a claim for that part of the entirety of the funding that ETPL is able to establish at trial was locked into the development for any period as a result of the delays caused by the remedial investigations and works and can also establish was incurring it in commercial loss because it was on loan for longer than it should have been or because either it or Vastint was unable to make commercial use of the money. Since the reasonable and recoverable basis for such claims is to take a reasonable rate of commercial interest that could have been paid or earned on that fund over the period of delay, the entirety of the fund which ETPL establishes is susceptible to this claim may yield damages calculated by taking the appropriate rate of interest over the proved period of prolongation over which the funds were locked into the development.

This alternative basis for deciding issue I is as follows:

“In relation to Preliminary Issue 1, would it make a difference to the outcome if, instead of the facts set out in paragraph 35 [ie that Nilsson provided the approval or confirmation of the standard details of the supplier of the proprietary membrane] it was ETPL who provided such approval and confirmation to Charter at this meeting but that Nilsson ought to have but did not warn ETPL that ETPL should not approve the details for construction use?”

This alternative basis for determining issue 1 is based on an assumed failure by Nilsson of a duty to warn ETPL rather than an assumed duty for it to provide details. Such a duty, if it arose, would not, as ETPL submitted, affect the scope of Nilsson’s duty. Indeed, it would widen it to include advice giving functions in relation to the design of others as well as design, detailing and inspecting functions.

These two alternative issues ask whether it would make any difference to the outcome if Nilsson did not have the knowledge referred to in any or each of the four sub-paragraphs of the schedule of assumed facts concerning the nature of the development. These sub-paragraphs are set out in paragraph 3 (a) - (d) reproduced in paragraph 17 above. Neither Nilsson nor Charter have made separate submission about these two alternative issues and I am to assume that all parties accept that, for the purposes of this issue only, the claims fall within the scope of Nilsson’s and Charter’s respective duties of care owed to ETPL. However, it must be highly arguable that the scope of their duties no longer extends to the consequential losses being claimed if any or all of the assumptions set out in paragraph 3(a) - (d) are excluded. Given that possibility, the absence of any submissions from Nilsson and Charter and the difficulty of dealing with the issue on this attenuated basis without factual findings, I will not provide an answer to these two issues.

This issue presupposes that the delay in the completion of the project caused there to be a delay in the sale of the houses and that, in the period between the date the sales would have taken place and the delayed date of the sales, the price of the houses rose. What is not considered in the formulation of the issue is the nature or extent of the increase. It is common knowledge that, over time, the price of property increases although that increase is not consistent and is subject to short term downturns. Furthermore, some price increases over a particular period of time merely reflect the general inflationary trends over time whereas others may arise from local, unusual or specific causes. For example, an unexpected and dramatic rise might have occurred as a result of extraneous planning factors or from the sudden ability of the claimant to take advantage of an enhanced marriage value arising from the sale creating the joinder of two property interests.

These uncertainties show that movement in property values are not directly linked to the development of property or to the delay in the completion or sale of the properties being developed resulting from a defendant’s breach of contract. This suggests that the question of whether a particular price rise was caused by or closely linked to a particular breach is a question of fact and that only those price rises that are closely linked to the breach need by taken into account in assessing damages. The loss that a claimant may recover from any breach is the net loss resulting from that breach but the balancing of gains and losses to arrive at that net loss must only take into account transactions that were directly linked to the breach.

This approach is one that is derived from the many cases cited in argument. Thus, in Hodgson v Trapp,²⁴ Lord Bridge stated:

“... when considering the assessment of damages in negligence, ... they are intended to be purely compensatory. When the damages claimed are essentially financial in character, being the measure on the one hand of the injured plaintiff’s consequential loss of earnings, profits or other gains which he would have made if not injured, or on the other hand, of consequential expenses to which he has been and which, if not injured, he would not have needed to incur, the basic rule is that it is the net consequential loss and expense which the court must measure. If, in consequence of the injuries sustained, the plaintiff has enjoyed receipts to which he would not otherwise have been entitled, prima facie those receipts are to be set against the aggregate of the plaintiff’s losses and expenses in arriving at the measure of damages.” (emphasis added)

Similarly, in Hussey v Eels,²⁵ Mustill LJ stated:

“I have dealt with the authorities at some length, because it was said that in one direction or another they provided a direct solution to the present problem. For the reasons already stated, I do not see them in this light. Ultimately, as with so many disputes about damages, the issue is primarily one of fact. Did the negligence which caused the damage also cause the profit - if profit there was?”

²⁴

[1989] 1 AC 807, HL. This was a personal injury case. The quotation cited is to be found at page 819.

²⁵

[1990] 2 QB 227, CA. The quotation from Mustill LJ’ s judgment is taken from page 241. This was a misrepresentation case arising out of enquiries before contract in a domestic property transaction.

This case is one involving a claim for damages for defective and poorly designed membranes. The normal measure of damages in such a case is the cost of repair, the measure being sought here. Nilsson’s scope of the duty in this case is defined as encompassing architectural services for a commercial residential development of houses at the top end of the market in terms of price, luxury, location and facilities. Thus, recoverable consequential loss naturally and foreseeably linked to that scope of duty would obviously extend to the direct costs associated with a delay in completion caused by the defects and their repair. This loss would not, however, normally extend to losses occurring after completion including losses arising out of the sale of the properties as a result of a downward movement in property prices unless the scope of Nilsson’s duty had been defined so as to include this loss and the possibility of its occurring had brought to Nilsson’s attention at the time of contract so as to bring it within the second limb of the Hadley v Baxendale rules. In other words, loss caused by a fall in the market would ordinarily be regard as too remote, not foreseeable and outside Nilsson’s scope of duty.

Thus, on the basis of the assumed facts on which this issue is to be determined, this case is one where the subsequent sale and its consequences are not sufficiently close to the negligent design and supervision, nor do they arise out of that breach of contract or duty, so that the loss or profit arising from the onward sales is not to be taken into account. The case is different from the Blue Circle Industries case where the contaminated land was, until its clean up had been completed, unsaleable. Between the date the land became unsaleable and the date thereafter if first became saleable again, the market value had halved from £l0m to £5m and the basis of the award of damages was that fall in value. This was because, as Chadwick LJ put it:

“The position in which the plaintiffs would have been in if the contamination had never occurred must be compared with the position in which the plaintiffs found themselves in the events which did happen. The opportunity to sell the estate to [the third party] in January 1993 was lost. The judge found as a fact that ‘the sale was aborted because of the 1989 incident and its aftermath.’ The estate was unsaleable, whether as a whole or in parts, until the completion of the clean-up operation; ... from that date the plaintiffs were ‘free once again to exercise their own choice as to the marketing of the estate’. ... There is no doubt that the estate was unsaleable (in whole or in parts) between January 1993 (when the defendant disclosed that the contamination of the marshland had occurred) and December 1994. During that period the plaintiffs were deprived of the opportunity to sell the land. The judge found, correctly as it seems to me, that the loss of opportunity was the direct result of the contamination. In my view, the plaintiffs are entitled to compensation under the Act of 1965 for the loss of the opportunity to sell.”²⁶

²⁶

ibid., paragraph 61, endnote 4. The quotation is taken from page 315.

This case is different because the claimant could have sold the houses at any time, albeit at a reduced price because of the defects. Ordinarily, that reduction would be arrived at by reference to the cost of repair or, if the repairs were to be undertaken by the claimant, by reference to a sum to reflect the disturbance to the claimant. The cost of repairs is being claimed and any additional nuisance payment would be recoverable as a direct consequence of the breach. However, where the claimant elects to await the conclusion of the repairs before selling, that is a decision taken by him unrelated to the original breach. The assumed facts in this case recite that the delay resulted in the funds being locked into the development longer than was anticipated but they do not suggest that sales were impossible in the interim period of delay or that the claimant had failed to mitigate its loss by not marketing the houses in that period. Thus, the sales were extraneous to the alleged breaches and were not part of one continuous transaction.

This case is therefore different from the type of valuation case in issue in the BBL case where Lord Hoffmann stated:

“But the question of whether the lender has suffered a loss is not the same as the question of how one defines the kind of loss which falls within the scope of the duty of care. The Court of Appeal ... justified its view on the latter question by an appeal to symmetry: ‘If the market moves upwards, the valuer reaps the benefit; if it moves downwards, he stands the loss.’ This seems to me to confuse the two questions. If the market moves upwards, it reduces or eliminates the loss which the lender would otherwise have suffered. If it moves downwards, it may result in more loss than is attributable to the valuer’s error. There is no contradiction in this asymmetry. A plaintiff has to prove both that he has suffered loss and that the loss fell within the scope of the duty. The fact that he cannot recover for loss which he has not suffered does not entitle him to an award of damages for loss which he has suffered but which does not fall within the scope of the valuer’s duty of care.”²⁷

²⁷

South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, HL at p 218

In this case, in contradistinction to the BBL case, the loss resulting from a fall in the market, had that occurred, would be too remote and hence irrecoverable in addition to it falling outside the scope of Nilsson’s duty of care. Thus, there is no potential for asymmetry whereby such loss is irrecoverable from Nilsson if the market falls but a corresponding profit for ETPL must be taken into account if the market rises. This is because, in both cases, the rise or fall is unconnected with the negligent act and too remote from it in addition to being outside Nilsson’s scope of duty.

A further reason why the sale of the houses is unconnected with the original breach is that the sale occurred long after the breach had occurred. Ordinarily, in a defects case, damages for negligence and breach of contract are assessed by reference to the date on which the breach of contract or duty occurred since that is when the damage was caused and the breach of contract arose. The case is similar to Jamal v Moola Dawood Sons & Co²⁸ where the seller of shares resold them to a third party when the contracted buyer declined to take them on the contractual sale date. The share prices had risen between the date of completion and the subsequent date of sale but the claimant seller, in an action for damages against the defendant buyer under the original contract, did not have to give credit for that rise. The measure of damages was assessed as the difference between the sale price in the contract and the market price on the contractual date for completion ignoring the subsequent rise in that price between that date and the actual sale off-loading the shares to a third party. Lord Wrenbury stated this:

“But the loss to be ascertained is the loss at the date of the breach. If at that date the plaintiff could do something or did something which mitigated the damage, the defendant is entitled to the benefit of it. . . . But the fact that by reason of the loss of the contract which the defendant has failed to perform the plaintiff obtains the benefit of another contract which is of value to him does not entitle the defendant to the benefit of the latter contract …”

[1916] 1 AC 175, PC.

At pp 179 - 180.

I conclude that, on the basis of the assumed facts, the rise in the sales prices of the houses, if such occurred, need not be taken into account in assessing ETPL’s recoverable damages nor need any rise in price be reflected in a reduced award of damages because the sales and any increased profit is unconnected with the original breaches, did not form part of the same transaction as those breaches and was not caused by them. Since, however, this question of recoverability is so fact sensitive, it is possible that the facts surrounding the sales and the movements in the property market would show that a different might show that a different conclusion should be taken. There is, however, no inkling of that possibility in the pleadings or the schedule of assumed facts.

The first alternative - Issue 2

This alternative asks:

Would it make any difference to the outcome if it were found that it was always the intention of ETPL:

to release the properties onto the market and to sell the properties in phases, which phases would not necessarily coincide with the “construction and completion” phases but would depend, at least in substantial part, on the state of the residential market at the time of completion?

These different assumed facts do not appear to affect the answer to issue 1. They relate to ETPL’s intentions and not to the potential linkage or lack of linkage between the breaches and the rise in sale prices occasioned by the delayed sale of the houses. My answer to this alternative is: “No”.

The second alternative - Issue 2

The second alternative seeks an answer to issue 2 on the same assumption that is used as the basis of the first alternative to issue 1. As with the first alternative answer to issue 1, the assumption that Nilsson’s breach was to fail to advise about the design to the membrane supplied by others is one that makes no difference to the answer to issue 2.

Conclusion