MALLINO DEVELOPMENT LIMITED v ESSEX DEMOLITION CONTRACTORS LIMITED

INTRODUCTION

CHRONOLOGY OF EVENTS

THE AGREED FACTS

THE FACTUAL EVIDENCE

THE AGREED LIST OF ISSUES

THE CORRECT MEASURE OF LOSS

WOULD EDC HAVE BEEN APPOINTED FOR THE SECTION 3 WORKS

QUANTUM OF CLAIM AND/OR COUNTERCLAIM

CONCLUSION

INTRODUCTION

These proceedings concern development works at Bodmin Jail in Cornwall. Bodmin Jail was constructed during the 18^th century and operated as a prison until 1927 after which it fell into disrepair.

The Development Works include:

The Claimant changed its name to Tudor Hotels Collection Ltd on the 8^th March 2022 but both parties have continued to refer to the Claimant as Mallino. Mallino was the developer and employer for the construction of the Dark Walk. The Defendant (“EDC”) entered into a contract executed as a Deed dated the 24^th April 2018 based upon the JCT Standard Building Contract Without Quantities Form 2016 Edition (The Contract).

In the First Recital of the Contract, it was stated that:

“the Employer wishes to have the following work carried out:

The expansion of existing visitor attraction (new build works only). The Dark Walk Attraction contract consists of constructing a new building to extend the existing visitor attraction. This includes the installation of attraction associated external works and drainage.

at

Bodmin Jail. Berrycoombe Rd, Bodmin, PL31 2NR (“the Works”)

and has had drawings and either a specification or work schedules prepared which show and describe the work to be done;”

The Contract Sum was £3,874,017.22. However, the work was broken down into three sections as set out in the Contract Particulars as follows:

On the same date the parties entered into a further contract (“The Variation Contract”) which at clause 2 headed “Variations of Contract” stated that:

“2.

Variation of Contract

2.1

With the agreement of the Contactor which is hereby given the Employer shall issue tenders for the works comprised in the Development save for the demolition works in respect thereto and shall invite the Contractor to tender for the same.

2.2

Following receipt of tenders issued pursuant to the agreement in clause 2.1 above the Employer shall award and enter into a contract for the whole of the works comprised in the Development and the Contract (New Contract).

2.3

In the event that the New Contract is awarded to and entered into with the Contractor then the Contract shall be deemed terminated and the Contractor shall proceed with the works under the terms of the New Contract. In which event: all payments made to the Contractor by the Employer under the Contract shall be deemed paid under the New Contract; All works carried out under the Contract shall be deemed carried out under the New Contract; All obligations owed by one party to the other under the Contract as at the time of termination shall be deemed owed by such party to the other under the New Contract.

2.4

In the event that the New Contract is awarded to and entered into with a contractor other than the Contractor (New Contractor) then at the option of the Employer, the Employer may by notice in writing served on the Contractor no later than 7 days after entering into the contract with the New Contractor either terminate the Contractor's employment under the Contract or novate the Contract to the New Contractor.

2.5

In the event that the Contract is terminated then: The Employer shall within 21 days pay to the Contractor all sums due under the Contract for the work undertaken by the Contractor together with the Contractor's reasonable costs of demobilisation; The Contractor shall not be entitled to loss of profit or overhead contribution on works not completed under the contract.

2.6

In the event that the Employer novates the Contract then: The novation shall be deemed as if entered into between the Contractor and New Contractor ab initio; The Employer shall procure that the New Contractor accepts the Contract as novated to the New Contractor and is bound to the Contractor in a relationship of main contractor and Trade Contractor and accepts that the terms of the Contract are deemed varied to reflect that relationship with the New Contractor assuming roles within the Contract normally undertaken by the Main Contractor and relieving the Contractor of the roles and obligations under the Contract usually performed by a main contractor; The Contract shall be deemed a trade contract for the demolition works only and not a main contract; the works to be performed under the Contract shall be limited to the demolition works; the obligations of the Contractor for all matters associated with a main contractor shall forthwith cease and be deemed included in the New Contract and the Contractor's role shall be limited to that of a trade contractor with no obligations for matters, without limitation, such as CDM, design, coordination, programming; Not withstanding that the Contract shall be deemed novated ab ignitio [sic], the Employer shall within 21 days of entering into the New Contract pay the Contractor for all work undertaken by the Contractor up to the date of the Employer entering into the New Contract; the Employer guarantees to pay to the Contractor any sum due to the Contractor from the New Contractor which is not paid by reason of the insolvency of the New Contractor.”

EDC carried out the Section 1 and Section 2 works. However, Mallino proceeded to appoint another contractor PIN-CM to carry out the Section 3 works without inviting EDC to re-tender or indeed without undertaking any competitive re-tendering process at all. This dispute concerns EDC’s alleged entitlement to recover its lost profit and overhead contribution suffered as a result of Mallino’s breach of clause 2 of the Variation Contract.

The dispute has already been the subject of two adjudications. In those adjudications Mallino denied that it had breached its obligations to EDC and denied that EDC was entitled to recover any lost profit or overhead contribution. The Adjudicator found in EDC’s favour and awarded EDC a proportion of its claimed losses.

In these proceedings, Mallino now admits that it did breach its obligations when it failed to invite EDC to re-tender for the Section 3 works. Notwithstanding that admission, it alleges that the Adjudicator was wrong as a matter of law to award EDC any loss of profit or overheads. In short, Mallino says that EDC's losses should be assessed by reference to Mallino's 'minimum contractual obligation', which would have entitled it to terminate EDC's employment without compensating it for lost profit or overheads. Mallino also says that, even if it had re-tendered the Section 3 works, it would not have selected EDC in any event.

CHRONOLOGY OF EVENTS

The chronology of events I find relevant to the issues raised in these proceedings is as follows:

THE AGREED FACTS

Following the transfer to the Part 7 procedure, Mallino did not seek leave to amend its Particulars of Claim and has continued to accept that it is bound by certain findings made in the Adjudicator’s Decisions.

The following matters remain agreed in these proceedings :

The fifth proposition is controversial but I accept the submissions on this point advanced by Emma Healiss for the Defendant and find that the fifth proposition is an agreed fact. If I may summarise the position on the pleadings:

THE FACTUAL EVIDENCE

Mallino called two Witnesses of Fact:

His evidence was that he was a qualified building surveyor but not a quantity surveyor. He started his career at E.C. Harris in 1999 where he worked in the Hotels Team until 2009 when he moved to the role of Head of Hotels at T&T.

T&T were the Project Managers, Cost Managers and Quantity Surveyors appointed by Mallino for the Bodmin Jail Development. In the Summer of 2017, Robert Cox was asked to take over the project management responsibilities at Bodmin Jail.

As Robert Cox explained in his Witness Statement:

“15.

In the summer of 2017, I was asked by my Managing Director at T&T to support our Bristol office in the delivery of the Bodmin Jail Hotel Project. At the time T&T Costs Management were appointed as the Quantity Surveyors for Mallino and receiving Project Management support from Phil Toghill of T&T. I became one of the project leads alongside my QS colleague Mark Rogers, with responsibility for achieving Mallino’s intended timeframes and budgets for delivery of the whole project.”

“17.

I held the role of project lead for the Bodmin Jail Project at T&T from October 2017 to October 2018, at which point I moved directly to the role of Managing Director at Mallino where I continued my work on the Bodmin Jail Project, now acting as the client rather than one of the client’s appointed professional consultants.

18.

In October 2021, I was promoted to my current role of CEO of Mallino.”

I found Robert Cox a difficult witness. He seemed somewhat brisk in his answers. For example, when asked on Day 1, page 119 questions about the Variation Agreement he commented as follows:

“Q. The point I’m focussing on at the moment, Mr Cox, is the wording of clause 2.1, which you’ve agreed was drafted by EDC

A.

It is, yes.

Q. And the proposition I’m putting to you is that it would make no commercial sense for EDC to propose this clause and thereby require its participation in this retender process if it thought it had no prospect of carrying out those works, would it?

A. I can only assume it was drafted by a solicitor, not by a contractor.”

This seems a somewhat surprising answer when one would have expected Mallino’s Project Manager at least to have read and to have understood the terms of the Variation Contract.

Timur Gorman was born in Russia and attained British Citizenship on the 29^th November 2018. As his Witness Statement explains

“11.

I previously was a major shareholder and CEO of a leading cosmetics company in Russia, called Concern Kalina ("Kalina"). I was the CEO and later the Chairman of Kalina from 1996 to 2011 and my current business-partner and fellow board member at Mallino, Mr Alexander Petrov, was the Chief Financial Officer.

12.

Kalina was sold to Unilever in 2011, at which point I began the process of moving to the United Kingdom and becoming a British citizen.

13.

As part of the process of naturalising to the UK, I changed my surname and those of my family by deed poll to 'Gorman' in September 2020. My name at birth was Timur Goriaev (alternatively spelled Goryayev). I note that my witness statement in the adjudication concerning the Dark Walk contract used my former surname Goriaev.”

It is clear from his Witness Statement drafted after Mallino had lost two adjudications and after Mallino had agreed for the purposes of these proceedings that:

“Mallino breached Clause 2 of the Variation Contract when it failed to re-tender the Section 3 Works.”

that Timur Gorman still does not understand how the Variation Agreement was intended to be operated.

If Timur Gorman understood the case advanced by EDC in the two adjudications and in these proceedings that statement would never have been included in his Witness Statement.

Like Robert Cox Timur Gorman stated that:

“… we never intended for EDC to carry out the construction works. We were aware that they had submitted a price for the purpose of the contract but this was not an attractive proposition for us”

See paragraph 54 of his Witness Statement.

However I do not accept this evidence. The witnesses may have persuaded themselves to say this because they failed to re-tender the Section 3 Works. However during the course of two adjudications and these proceedings Mallino’s witnesses views regarding EDC have hardened in respect of EDC’s competency to carry out the Section 3 Works who I consider would have been a satisfactory contractor for the Section 3 Works if the works had been re-tendered.

I consider it unfortunate that Timur Gorman on Day 2, page 39 described EDC as “monkeys” in the course of his evidence. This emerged as follows during his cross examination: -

“Q. Okay. I'm just going to ask you my question one more time because I don't think that you answered it, is whether you will accept that if you had been told EDC had plenty of experience to carry out the Dark Walk works and it had submitted a tender substantially cheaper than PIN's, you would have appointed EDC?

A.

If I would receive recommendation from T& T, that there is a brilliant company with a lot of successful projects, I would consider this company as a potential contractor. EDC as a name popped up several times during this project and not always in a very positive context. A small company, errand company, doing, you know, some chores -- we call such companies "monkeys" normally -- doing small jobs, and I would never consider a handyman to be instructed to build a stately manor it's just not how it works in the real world.”

That description of EDC was odd particularly given during his evidence:

For the Defendant only one witness was called for cross-examination.

Stephen Baker is a director of EDC and had worked in the demolition and construction industry for 46 years and had been a director of EDC since 1998. He maintained in his Witness Statement at paragraph 3.14 to 3.16:

“EDC'S PRIOR EXPERIENCE

3.14

I understand that Mallino has previously suggested that it had concerns about EDC's alleged lack of experience in undertaking building works and that was a crucial factor in it appointing an alternative contractor to undertake the Section 3 Works.

3.15

As confirmed at the start of this witness statement, I have been a director of EDC since 1998. I am therefore able to explain EDC's prior experience in delivering a project like the one at Bodmin Jail.

3.16

Whilst EDC is a specialist demolition contractor, the company also delivers complex building projects. Had EDC been given the opportunity to re-tender the Section 3 Works, I would have worked with the team to ensure that further details of its building experience were included to support the re-tender.”

I found Stephen Baker to be an impressive witness. His answers were clear and concise and he avoided arguing his case or resorting to exaggeration or obfuscation.

LIST OF AGREED ISSUES

The parties have agreed a List of Issues for use at Trial. During the Opening and Closing Oral Submissions little, if no, reference was made to the Agreed List of Issues. I intend to only use this Agreed List of Issues as the broad framework for the remainder of this Judgment.

The parties have an agreed introduction to the Agreed List of Issues which states:

“This list of issues has been agreed by the parties for use at trial. It is intended to reflect the main issues in the case so as to provide an agenda for the trial of this matter, but is not intended to repeat the pleadings or to constrain the parties' entitlement to raise pleaded issues at trial.

Mallino’s primary case is that the claim and counterclaim may be determined by resolution of a legal question as to the correct measure of EDC’s loss and that, as such, there is no need for the Court to consider the underlying facts. That case is put forward on the basis that, save as expressly put in issue, the Adjudicator's findings are temporarily binding on the parties. If Mallino is correct about this, it says that issues 4 and 6-10 below will ultimately not be relevant. For the avoidance of doubt, EDC does not agree with that analysis. Its case is as per the next paragraph.

EDC’s case is that, in order to determine the claim and counterclaim, it will be necessary for the Court to consider the factual background. EDC’s position is therefore that all issues set out below are relevant and will need to be determined.

For the purposes of these proceedings, the following facts are assumed to be correct: (i) the Contract and the Variation are a single overarching contract; (ii) Mallino was in breach of clause 2 of the Variation for failing to tender section 3 of the Works; and (iii) the letter of 22 November 2019 particularised at paragraph 13 of the Particulars of Claim was ineffective as a termination notice.”

The Agreed List of Issues is then split into two sections:

THE CORRECT MEASURE OF LOSS

Mallino’s case is that:

I accept that where a contract entitles a Defendant to perform in alternative ways or the Defendant has a discretion as to the contractual benefits to be conferred on the Claimant damages are generally to be assessed on the basis that the Defendant would perform in the way most favourable to himself.

I also accept as Andrew Burrows points out in “Remedies of Tort, Breach of Contract and Equitable Wrongs”:

“In applying the usual minimum obligation principle there are two qualifications that must be borne in mind. The first is that, while a particular performance may be the least burdensome to the defendant when judged solely according to the contract, this may not be the basis upon which damages are assessed because the courts judge the defendants least burdensome performance by taking all other potential losses into account, The classic expression of this was in Lavarack v Woods of Colchester Ltd, where Diplock LJ said, ‘.one must not assume that he [the defendant] will cut off his nose to spite his face and so [act] as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects.’ The decision in Bold v Brough, Nicholson and Hall Ltd⁶⁵ is probably best explained on this basis. There the claimant, who had been wrongfully dismissed by the defendant, claimed for the loss of pension rights. Phillimore J held that the claimant should be compensated for this loss even though the defendant had the right to terminate the pension scheme on notice because it was unlikely that it would have taken a step so disastrous to its relations with all its employees solely to defeat a claim by this plaintiff.’

However in this case there is a major stumbling block to the application of the minimum obligation principle. The principle in Lavarack does not apply in cases such as this case where the contract imposes an obligation on the Claimant and then gives the Claimant a discretion as to how to perform that obligation. This is clear from the following three cases:

I find that Mallino is wrong to rely upon Lavarack and to contend that the Variation Contract provided Mallino with alternative modes of performance such as:

I disagree. Clause 2 of the Variation Contract imposed upon Mallino a mandatory obligation to re-tender the Section 3 works including EDC in that process. Mallino may have had:

WOULD EDC HAVE BEEN APPOINTED FOR THE SECTION 3 WORKS?

EDC’s primary case is that the Court should conclude that EDC would have been the contractor for the rest of the works. In other words EDC should recover the entirety of its Counterclaim without deduction for the loss of a chance/the risk that it would not have won the contract.

I consider that on the evidence that goes too far. EDC’s success in any re-tendering exercise could not be regarded as a dead certainty on the balance of probabilities. There was always a risk that another contractor might enter the race or that PIN-CM might have produced a more competitive price.

As Mallino in their written opening opinion stated that:

“The Court is familiar with the principles governing loss of a chance: if the Court finds that the minimum contractual obligations principle does not apply then it will need to consider what might have happened had the retendering exercise anticipated by the variation agreement taken place. If it finds that Mallino might have awarded the contract to EDC then it may award damages in that regard discounted by a percentage to reflect the Court’s analysis of the probability of EDC being awarded the work.”

The question is a question of causation. As Stuart Smith LJ pointed out in Allied Maples v Simmons & Simmons (a firm) [1995] 1 WLR 1602 at 1614.

“But, in my judgment, the plaintiff must prove as matter of causation that he has a real or substantial chance as opposed to a speculative one. If he succeeds in doing so, the evaluation of the chance is part of the assessment of the quantum of damage, the range lying somewhere between something that just qualifies as real or substantial on the one hand and near certainty on the other. I do not think that it is helpful to seek to lay down in percentage terms what the lower and upper ends of the bracket should be.

All that the plaintiffs had to show on causation on this aspect of the case is that there was a substantial chance that they would have been successful in negotiating total or partial (by means of a capped liability) protection.”

In my judgment the correct approach in the present case is:

Taking each point in turn:

That is what Stephen Baker said in his Witness Statement (see paragraph 2.12):

“I therefore believe it is highly likely that EDC would have re-tendered the same Section Sum for the Section 3 Works being £3,023,231.23”

and he maintained that stance when cross-examined. On Day 2 page 94 he was questioned as follows:

“Q . Yes? You say there -- you are talking above about PIN's performance, when it comes to quoting, and then you say at 19:

“In contrast, at the time that Mallino ought to have carried out the re-tender exercise , EDC already had a complete tender and could have potentially refined it. EDC had assembled a team to work on its proposals for the building contract which included very experienced commercial managers, project managers, quantity surveyors, planners and a project director ."

And you say that this would have ensured that EDC's retender was both competitive and robust.

A. Correct .”

I consider and so find that there was a real and substantial chance that Mallino would have appointed EDC for the Section 3 Works. I reach that finding on the basis of the following matters:

I accept and so find that PIN-CM’s competence as an alternative contractor to EDC for the Section 3 Works has been exaggerated for example;

In all these circumstances, I find that EDC, if the Stage 3 works had been re-tendered, were ready, willing and able to carry out that work. It is an agreed fact that EDC “would have been able to carry out the Section 3 works if it had been appointed”. Even if that fact was not agreed, I find that if the re-tendering exercise had been carried out EDC :

In any event, if Mallino is correct that the principle in Lavarack does apply, I do not accept that the least burdensome course would have been to terminate EDC’s appointment. The correct approach is to consider what, on the facts, would have been the least financially burdensome option available to Mallino. Diplock LJ made this clear in Lavarack when, at paragraph 295, he stated:

“The events extraneous to the contract, upon the occurrence of which the legal obligations of the defendant to the plaintiff thereunder are dependent, may include events which are within the control of the defendant: for instance, his continuing to carry on business even though he has not assumed by his contract a direct legal obligation to the plaintiff to do so. Where this is so, one must not assume that he will cut off his nose to spite his face and so control these events as to reduce his legal obligations to the plaintiff by incurring greater loss in other respects. That would not be the mode of performing the contract which is "the least burthensome to the defendant.”

To reject EDC’s tender in any re-tendering exercise would require Mallino to risk cutting off its nose to spite its face.

QUANTUM OF CLAIM AND/OR COUNTERCLAIM

In Order to establish the quantum of their claim.

Taking each in turn.

EDC’s Counterclaim has been broken down and explained in their written opening as follows:-

The Court has had the assistance from two independent expert witnesses Stuart Hardy instructed on behalf of the Claimants. Alan Whaley instructed by the Defendants.

The experts have helpfully agreed on a figure as figures basis that the following sums are associated with EDC’s counterclaim for loss of profit and overhead contribution.

Alan Whaley in his report provides a very helpful table showing the overall range of possible recovery of OH&P as set out below.

On the issue as to what documentation should have been retained by EDC to support this Counterclaim I prefer the somewhat more pragmatic approach of Alan Whaley suggesting that a contractor of the size of EDC would not be expected to retain much documentation relating to the original tender or the Counterclaim generally.

With regard to each head of counterclaim I find on the balance of probabilities as follows:

As the Editors of Hudson Building and Engineering Contracts 24^th Edition point out at paragraphs 7-021.

“Once it is found that the chance is real and not merely speculative, then the quantification of that chance is a matter of measure of damage and not causation. A claimant must therefore show that the defendant's actions have caused the loss of a real or substantial chance which would have represented a benefit to the claimant on a balance of probabilities. Once the chance has been established, the value of the benefit lost will be assessed according to the likelihood of the benefit accruing to the claimant. This may involve an assessment at less than 50 per cent.”

In considering any such assessment the Court should bear in mind the decision of Allied Maples v Simmons & Simmons [1995] 1 WLR 1602 which suggests that there is a reluctance to lay down a bracket in percentage terms when assessing a loss of a chance.

The chance of being awarded the Section 3 Works was certainly not speculative. I have found that for the reasons set out in Section 7 of this Judgment that EDC had a real and substantial chance of their tender for the Section 3 Works being accepted if they had been given the opportunity to re-tender for this work. On the basis of that evidence I assess the percentage chance of EDC successfully being awarded the contract for the Section 3 Works at 66%.

CONCLUSION

In these circumstances EDC is entitled to damages assessed at 66% of £321,391.71 being £212,118.53.

I will hear the parties at a date to be fixed on all questions of interest and costs and how the sum paid pursuant to the Second Adjudication Decision should be dealt with insofar as these matters cannot be agreed.