Hargreaves & Ors v Barron Industrial Services Ltd. [2003] EWCA Civ 1038

Case No A3 2002 2360Neutral Citation No. [2003] EWCA Civ.1038
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
Venue BIRMINGHAM DISTRICT REGISTRY
(His Honour Judge Norris QC)
Venue Royal Courts of JusticeDate Thursday 24 th July 2003
Strand,
London, WC2A 2LL
Before
LORD JUSTICE BROOKELORD JUSTICE JONATHAN PARKER
Between
Hargreaves & OrsAppellantsBarron Industrial Services LtdRespondent
(Transcript of the Handed Down Judgment ofSmith Bernal Wordave Limited, 190 Fleet StreetLondon EC4A 2AGTel No: 020 7421 4040, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr Andrew Tabachnik (instructed by Messrs Reynolds Porter Chamberlain) for AppellantsMr George Thomas (instructed by Messrs Beasley Johnson Loyns) for Respondent
JudgmentAs Approved by the CourtCrown Copyright ©

INTRODUCTION

[1]This is an appeal by the first three defendants in the action, namely Mr Martin Hargreaves, Mr Robert Shimwell and Mr James Whitehouse, against an order made by HHJ Norris QC in the Birmingham District Registry on 29 October 2002. By his order, the judge entered judgment against the appellants and in favour of Barron Industrial Services Ltd, the claimant in the action and the respondent to this appeal, in the sum of £19,000.[2]Permission to appeal was granted by Peter Gibson LJ on the papers on 7 March 2003.[3]The judge found the appellants to be liable to the respondent for damages representing the loss of a chance of being awarded a contract for the maintenance of bus shelters in the West Midlands for a two-year period commencing in April 1996. The contract was put out to public tender by a local transport authority known as Centro (an agency which manages transport issues for Birmingham City Council), and I will refer to it hereafter as “the 1996 Contract”. The judge valued the 1996 Contract in the sum of £47,500, and assessed the respondent’s chance of obtaining it at 40%: hence the award of damages in the sum of £19,000 which represents 40% of £47,500.[4]There is no appeal on the issue of liability, nor is there an appeal against the judge’s assessment of the extent of the chance at 40%. The only aspect of the judgment which is challenged on this appeal is the judge’s valuation of the 1996 Contract at £47,500.

THE FACTUAL BACKGROUND

[5]The factual background to the dispute may be summarised as follows.[6]The respondent was incorporated in December 1991 and has since carried on a civil engineering business which includes the maintenance of bus shelters. The overall manager of the respondent’s business, together with the businesses of two associated companies, is and has at all material times been Mr Anthony Graham.[7]Mr Hargreaves, the first-named appellant, began working for the respondent in about 1992. He was responsible for the day-to-day administration of its business, including the operation of its various contracts and the drawing up of tender documents. He left the respondent’s employment in February 1996. For the previous three years or so he had been the respondent’s general manager, working under Mr Graham.[8]Prior to October 1994 Mr Shimwell, the second-named appellant, was formerly employed by an associate company of the respondent known as Kinmain Construction Ltd. In October 1994 he left that company and joined Mr Whitehouse, the third-named appellant, in carrying on business in partnership, and in competition with the respondent, under the name Nu Weld Engineering Services. In June 1995 the business was acquired by a limited company formed by Mr Shimwell and Mr Whitehouse for that purpose and known as Nu Weld Engineering Services Ltd (“Nu Weld”). Nu Weld was originally joined as the fourth defendant in the action, but was removed as a defendant shortly before the trial.[9]In 1994 the respondent won a contract to carry out maintenance work to bus shelters for Centro in three specified areas for the two-year period commencing in April 1994 (I shall refer to this contract hereafter as “the 1994 Contract”). The 1994 Contract was managed on behalf of the respondent by Mr Hargreaves, with the assistance of a Mr Tonks (another employee of the respondent). The unchallenged evidence of Mr Hargreaves was that they each spent 25 per cent of their time on the 1994 Contract.[10]In Autumn 1995 Centro invited tenders for the 1996 Contract. The deadline for the submission of tenders was 6 December 1995. Both the respondent and Nu Weld intended to (and in the event did) submit tenders.[11]Under the terms of Centro’s invitation to tender, materials were to be priced at cost plus 10%. There were two other principal income-producing elements of the tender. The first was the charge for labour involved in replacing polycarbonate sheeting on bus shelters, known as “Lexan” sheets. It is common ground that under the 1994 Contract the respondent replaced an average of 24 Lexan sheets during each of 102 weeks of the contract (i.e. 2448 sheets in all). The respondent’s labour charge for this item under the 1994 Contract was £29.50 per sheet. The other principal income-producing element in the tender was the hourly rate for labour relating to other heavy maintenance work. Under the 1994 Contract, the respondent’s employees worked an average of 39 hours during each of the 102 weeks of the contract (i.e. 3978 hours in all). The respondent’s price for such labour under the 1994 Contract was £12.75 per hour.[12]On 4 December 1995 Mr Hargreaves gave in his notice. He was required to give one month’s notice, and his notice was expressed to take effect from 5 January 1996. However, in his resignation letter he suggested that he leave immediately, on the basis that he was already owed two weeks’ holiday and the Christmas break was approaching. This suggestion did not find favour with Mr Graham, who needed Mr Hargreaves to draw up the tender documents for the 1996 Contract prior to the deadline of 6 December 1995. At a meeting with Mr Graham later that day, Mr Hargreaves agreed not to leave until 1 February 1996.[13]The judge found that, unknown to Mr Graham and to the respondent, for some weeks prior to 4 December 1995 Mr Hargreaves had, in collaboration with Mr Shimwell and Mr Whitehouse, been working on the figures to be submitted by Nu Weld in its own tender to Centro for the 1996 Contract.[14]On 5 December 1995, following a further meeting with Mr Graham, Mr Hargreaves completed the preparation of the respondent’s tender.[15]The respondent’s tender quoted £25 for the replacement of a Lexan sheet and £13.25 for the hourly labour rate. The judge found that those figures were Mr Hargreaves’ figures. He further found (in paragraph 55 of his judgment) that the figures which Mr Hargreaves should have recommended to Mr Graham were £17.19 and £12.25 respectively. In paragraphs 56 to 58 of his judgment the judge found, on the balance of probabilities and accepting Mr Graham’s evidence on this point, that had Mr Hargreaves put forward those figures, as he should have done, Mr Graham would have accepted the £12.25 figure but would have increased the £17.19 figure to £17.25.[16]On the evening of 5 December 1995 a meeting took place in a pub between Mr Hargreaves and Mr Shimwell, in the course of which Mr Hargreaves provided figures to Nu Weld for inclusion in its tender. The figure to be included in the Nu Weld tender for the labour cost of replacing a Lexan sheet was to be £13.35; and the hourly labour rate was to be £12.25. However, as the judge found, the figure of £13.35 was part of a dishonest arrangement, or scam, which had been devised by the appellants whereby Lexan sheets would be purchased by Nu Weld at a hidden discount, with Centro being invoiced for the full price and accordingly paying Nu Weld the full price (being the apparent cost to Nu Weld) plus 10%.[17]On 6 December 1995, the last day for doing so, tenders were submitted by both the respondent and Nu Weld. The figures in the respondent’s tender were those which Mr Hargreaves had recommended to Mr Graham. The respondent’s tender also included, as was Mr Graham’s standard practice, a 25% uplift to provide a contribution to overheads and, if all went well, an element of profit. A similar 25% uplift had been included in the respondent’s successful tender for the 1994 Contract.[18]Shortly thereafter Mr Graham became suspicious about Mr Hargreaves’ conduct, and he arranged for telephone calls made by Mr Hargreaves from the respondent’s office to be tapped. In due course the transcripts of Mr Hargreaves’ telephone conversations established that he was collaborating with Mr Shimwell and Mr Whitehouse in an attempt to ensure that the Centro contract was awarded to Nu Weld rather than to the respondent.[19]The strategy appeared to have worked when, on 15 January 1996, Nu Weld was awarded the contract in respect of heavy maintenance work in Birmingham, Coventry and Solihull.[20]By mid-January 1996, however, Centro was itself becoming suspicious concerning the tenders that had been submitted by the respondent and by NuWeld, and it commissioned an internal investigation.[21]On 1 February 1996 Mr Hargreaves left the respondent’s employment and joined Nu Weld. Immediately prior to his leaving the respondent, Mr Hargreaves salary was £26,000 per year. Later that month Centro, having confirmed its suspicions, suspended both the respondent and Nu Weld from the tender process and awarded the contract which had previously been allocated to Nu Weld to a third party, West Midlands Travel.[22]In March 1996 Mr Tonks was dismissed by the respondent.[23]In about April 1996, Mr Graham employed a Mr Smith to replace Mr Hargreaves, albeit at a lower salary than the £26,000 per year salary which Mr Hargreaves had been receiving when he left.[24]In December 1997 the respondent tendered for further work from Centro, but was unsuccessful on price grounds.[25]In the action, which was commenced on 17 February 1998, the respondent claims damages against Mr Hargreaves for breach of his duty of good faith and fidelity; against Mr Shimwell and Mr Whitehouse for inducing a breach of Mr Hargreaves’ duties to the respondent; and against all three appellants for conspiracy. In the particulars of loss and damage pleaded under paragraph 24 of its Amended Statement of Claim, the respondent claims damages of “£100,000 approximately: loss of opportunity to bid for and/or loss of Centro contract renewal [i.e. the 1996 Contract]”. In its Calculations of Loss, served later, the respondent claims “damages for loss of profit on the bus-shelter maintenance contract [again, a reference to the 1996 Contract]”. In paragraph 37 of their Defence, the appellants, after making a general denial of the allegations of loss and damage, plead as follows:
“Without prejudice to the foregoing general denial it is specifically denied that [the respondent] had any realistic chance of obtaining the Centro contract.”
[26]Thus, in the context of damages, the issues on which the parties were joined so far as the 1996 Contract was concerned were(a) whether the appellants’ wrongful actions had caused the respondent to lose a real chance of successfully tendering for the 1996 Contract, and(b) if so, the value of that chance. The evaluation of the chance under issue (b) inevitably required the court to assess the value of the 1996 Contract itself, before discounting that value to reflect the chance element.

THE TRIAL

[27]Before the judge, there was a stark difference of approach to the issue as to the value of the 1996 Contract.

The judge described this difference of approach in paragraph 6 of his judgment, as follows:

“[The respondent’s] favoured method for calculating damages for the loss of the chance which it said it had suffered was a ‘top down’ method. Proceeding from the fact that, as a public authority, Centro would spend the whole of its budget for any particular item, [the respondent] looked at the budget allocated to be spent during the two-year life of the renewed contract, estimated the proportion of that budget that would have been spent in the district where the [respondent’s] tender was likely to have been successful …. and then, on the basis of the performance achieved by [the respondent] for the two years in which it had held the [1994 Contract], assessed the profit margin that would have been achieved by [the respondent] on that expenditure by Centro placed with [the respondent]. By contrast [the appellants’] approach was a ‘bottom up’ approach which involved starting with the individual rates for individual rates of work, assessing the quantity of work available at each rate (looking at how many jobs had actually been done in each category over the preceding two years) then itemising the expenditure that would be incurred in doing that number of jobs, allocating a specific sum for each individual cost incurred in operating the business, and by that means calculate a weekly profit. All of these elements were set out in the form of a Scott Schedule: and by order dated 26 September 2001 (made by consent) [the respondent] was ordered to complete the Scott Schedule, presenting its detailed case on each figure. This also had a very significant impact on the form of the trial.”
[28]In its Calculations of Loss (served on 11 February 2000) the respondent valued the 1994 Contract at £66,028.62. Basing itself on that valuation, it valued the 1996 Contract at £119,670 (excluding a claim for £50,000 exemplary damages, which had been struck out at an interlocutory stage). By contrast, the appellants’ Calculation of Loss values the 1996 Contract by reference to a weekly profit/loss figure, the calculation of which brings into account not only variable costs (that is to say, costs directly attributable to the 1996 Contract), but also a proportion of the respondent’s fixed overheads. On that calculation, the respondent would have made a weekly loss on the 1996 Contract of £285.69, making a total loss of £29,711.76 over the full period of the contract.[29]In their evidence at the trial, Mr Graham supported the former approach; Mr Hargreaves (as the main protagonist for the appellants on this issue) the latter.[30]However, disclosed documents revealed that the detailed cost-based approach to the valuation of the 1996 Contract which Mr Hargreaves espoused at trial was not the approach which he had adopted in December 1995 when working out the figures to be included in the respective tenders. After referring to the mass of highly detailed evidence which Mr Hargreaves had presented in relation to the various heads of cost, and giving particular examples,

the judge observed (in paragraph 65 of his judgment):

“Nothing of this added anything of substance to the task which I have to undertake. It formed no part of the pricing of the [1996 Contract] either by [the respondent] or Nu Weld, which each proceeded by the identification of a number of heads of expenditure, and the attribution to them of round figure estimates. There was nothing in the actual costings prepared by Mr Hargreaves for [the respondent] and Nu Weld that was truly comparable to the Scott Schedules produced for the purposes of the action, and most certainly nothing that compared with the range of issues debated at trial. It simply never occurred to anyone (to provide another example) to adjust the annual audit charge because there would be more transactions for the auditor to look at (an argument advanced at trial). I propose to ignore this useless refinement.”
[31]Mr Hargreaves also asserted in his evidence that whereas on the figures included in Nu Weld’s tender (and ignoring any hidden discount on the purchase of materials) the 1996 Contract would have been profitable to Nu Weld, the respondent’s operation was inherently less efficient that that of Nu Weld, and that the respondent would inevitably have operated the 1996 Contract at a substantial loss.[32]In his witness statement, Mr Shimwell adopted the same line as Mr Hargreaves. However, in his oral evidence he took a different stance, acknowledging that Nu Weld could not have operated the Centro contract profitably at the figures in its tender.

(f) of his judgment that:

“The actual figures submitted on behalf of Nu Weld would not have enabled the contract to have been operated profitably and there would have been a very strong temptation (if not an absolute necessity) to perpetrate a fraud on Centro (either by overcharging for materials or by falsely declaring the labour involved in completing the jobs).”
[33]I must refer at this point to two passages in the cross-examination of Mr Graham by Mr Andrew Tabachnik (appearing for the appellants, as he does before us), since they formed the basis of a submission made by Mr Tabachnik both to the judge and to us, to the effect that this evidence established that Mr Smith, on his own, would not have had any time to devote to the management of the 1996 Contract, with the consequence that the respondent, had it won the 1996 Contract, would have had to employ an additional manager. Mr Tabachnik submits that it follows the cost of so doing ought to be brought into account in assessing the profitability of the 1996 Contract.[34]In the first such passage Mr Tabachnik asked Mr Graham whether Mr Smith had “a full load on his plate” managing the various other contracts on which the respondent was engaged in the period 1996 to 1998. Mr Graham answered:
“He was fully employed by me, yes.”
[35]Later in his cross-examination Mr Tabachnik returned to this subject, as follows:
“Q. You have already told us that Mr Smith was in your words ‘fully employed on other matters’ during 1996 through to 1998. If you had won this particular contract you would have had to have got somebody else in to manage it, would you not? A. No, he [i.e. Mr Smith] would have done that. Q. But you have just told us that he was fully employed? A. That is right, as a manager, that is correct. JUDGE NORRIS: When you said that he was fully employed as a manager, did you mean that he was employed full-time as a manager, or did you mean that he was working flat out? A. No, he was employed full-time, in other words he was being paid a salary to do a job, managing the place. MR TABACHNIK: Mr Graham, that is just not right, is it, because the context in which you …. gave the answer that he was fully employed was following a discussion that you and I had had about the other work [the respondent] was doing at the time? A. I am sorry you misunderstood me. My thought was he was fully employed as a manager by me. That is what I thought I was answering.”

Q. But you have just told us that he was fully employed?

[36]I can now turn in more detail to the judge’s careful and detailed judgment.[37]At an early stage in his judgment the judge recorded his assessments of the reliability of the oral evidence of the main protagonists. As to Mr Graham, the judge concluded (in paragraph 8 of his judgment) that:
“.... he was, in relation to the central events which actually occurred, a credible witness, even though in relation to less central events I felt he was telling the truth, but not the whole truth.”
[38]In paragraph 9 of his judgment the judge said that Mr Graham’s evidence must be approached with caution.[39]As to Mr Hargreaves,

the judge said this (in paragraph 9 of his judgment):

“On the central factual issues, however, I find myself unable to treat Mr Hargreaves’ evidence as reliable.”
[40]Elsewhere in his judgment, the judge described Mr Hargreaves’ evidence on a particular issue as being “unbelievable” (see paragraph 31 of the judgment).[41]As to Mr Shimwell,

the judge said this (in paragraph 10 of his judgment):

“The remarkable feature of Mr Shimwell’s evidence at trial was the extent to which it had not been foreshadowed in his witness statements. A fair summary of his position before getting into the witness box would be that he presented a united front with Mr Hargreaves. In the witness box he was far more ready to accept his own part in the wrong-doing, to accept his knowledge of Mr Hargreaves’ wrong-doing, and to accept that the Nu Weld bid was to a significant degree dependant for its profitability on the perpetration of a fraud upon Centro. Mr Shimwell also suffered the humiliation of a criminal conviction for his part in the Centro tender process and may well have cause to seek a public rehabilitation. For example, I have found the public thanks which Mr Shimwell gave to Mr Graham for having discovered the fraud intended to be practised on Centro (and so preventing him from actually carrying it into effect) to be less than wholly convincing. I have not therefore automatically treated the evidence given to me orally by Mr Shimwell to be the true account and that contained in his witness statement (which accords with Mr Hargreaves) to be an untrue account: but in the end that is the conclusion I have reached.”
[42]On the issue of liability, the judge found Mr Hargreaves to have breached his duty of good faith and fidelity to the respondent, and he also found Mr Shimwell and Mr Whitehouse liable for having induced a breach of contract by Mr Hargreaves. The judge did not explore the issue of liability in conspiracy, since he concluded (rightly, in my judgment) that the allegation of conspiracy added nothing to the other causes of action pleaded.[43]In paragraph 53 of his judgment, the judge turned to the issue of damages, and to the claim for damages for loss of a chance.[44]In paragraph 55 of his judgment

the judge said:

“It was not demonstrated to me that there was any feature of [the respondent’s] operation which necessitated a higher variable cost for doing any particular job than that borne by Nu Weld: and in each case there was a 25% uplift to cope with fixed cost overheads and profit.”
[45]The judge found (in paragraph 59 of his judgment) that what had been lost as a result of the appellants’ wrongful actions was a real, as opposed to a speculative, chance of obtaining the 1996 Contract. The judge then proceeded to assess that chance at 40%. As I have said, there is no appeal against that assessment.[46]The judge also found, as noted earlier, that had Mr Hargreaves properly discharged his duties to the respondent Mr Graham would have accepted Mr Hargreaves’ advice as to the figures to be included in the tender (subject to increasing the labour cost for replacing a Lexan sheet from £17.19 to £17.25), and that the respondent would have tendered for the 1996 Contract on the basis of £17.25 for the cost of replacing a Lexan sheet and of £12.25 as the hourly rate for other heavy maintenance work.[47]In paragraph 65 of his judgment, the judge began his evaluation of the 1996 Centro Contract, as a preliminary to applying the 40% discount. After reminding himself that the evaluation of the loss of a chance is not an exact science, and noting that in Chaplin v. Hicks [1911] 2 KB 786 the court took a broad view as to the sum which represented fair compensation for the injury suffered, he observed:
“The assessment does not become more accurate simply because a multiplicity of inaccurate calculations is undertaken. The end result is no more accurate than if one big (admittedly) inaccurate sum is done.”
[48]However, the judge went on to note that there were (as he described them) some genuine issues of principle to be addressed.[49]The first such issue arose out of Mr Tabachnik’s submission, to which I referred earlier, that in assessing the value of the 1996 Contract, the cost of employing an additional manager should be brought into account.

The judge rejected that submission, saying this (in paragraph 66 of the judgment):

“The view which I expressed at trial (and which was espoused by Mr Thomas) was that in costing a contract there were direct costs (such as consumables, fuel or hourly paid labour), there were variable costs (such as cost of plant and equipment) which were costs which would be carried by the business but which would vary (though not proportionately) with the actual volume of work undertaken, and there were fixed costs (such as the rent and the salaries of administrative staff) that will continue to be paid irrespective of the work undertaken I treated the salary of Mr Hargreaves and Mr Tonks as falling into this last category. Mr Tabachnik accepted this as a general principle but said in the instant case both Mr Hargreaves and Mr Tonks had left [the respondent], that they had been replaced only by Mr Smith, that Mr Smith alone would not have had the capacity to deal with the work generated by the [1996 Contract], so somebody else would necessarily have been employed simply because of the [1996 Contract] and accordingly that cost should be specifically attributed to the [1996 Contract]. This argument still seems to me to be wrong. In the tender price there is a 25% uplift to cater for overheads (fixed or variable); and at the time that uplift was applied, the salaries of Mr Hargreaves and Mr Tonks formed part of the overhead burden. I do not see that if (when the contract comes to be performed) somebody has to be taken on to assist Mr Smith, then that person’s salary should be added as a direct cost as well as forming part of the 25% uplift already provided for. I rule against this submission.”
[50]The second issue of principle which the judge addressed related to Mr Tabachnik’s argument that a number of additional heads of expenditure (eg van hire, fuel, telephone, audit fee, legal fees and inflation) should also be treated as costs relating exclusively to the 1996 Contract and brought into account accordingly in assessing the profitability of the 1996 Contract. The judge rejected that submission on the same ground as he had rejected Mr Tabachnik’s earlier submission. He continued (in paragraph 67 of the judgment):
“Multiple minor cost heads were not separately quoted for in the contract but simply formed part of the 25% uplift.”
[51]The judge then turned to the third issue of principle upon which he was required to rule, namely the extent to which he could rely on Mr Hargreaves’ analysis of the profitability of the 1996 Contract. In paragraph 68 of his judgment he said this:
“The third general issue is the extent to which I can rely on Mr Hargreaves’ analysis of the profitability of the [1996 Contract] if [the respondent’s] adjusted rates were applied to it. Mr Hargreaves’ conclusion is that the contract would not have been profitable. He reaches that conclusion by revaluing the [1994 Contract] (which, on the figures he prepared for Nu Weld, had produced a profit in excess of £50,000) by substituting the adjusted 1996 tender figures. If this income had been reduced in line with the reduced rates, and the same costs deducted from it, then the 1994 Contract would have produced a gross profit of just under £28,000, a profit which Mr Hargreaves then eliminates by charging administration salaries and variable overheads against it. I have ruled against both those deductions, so that leaves an apparent profit of £28,000. However, this profit is itself understated because Mr Hargreaves has deducted the original 1994/1996 costs, whereas it was an integral part of his computations on behalf of Nu Weld that the piece work price for the installation of a Lexan sheet could be reduced from £12 to £9.15. (Mr Hargreaves’ calculation assumes that in assessing income Lexan sheets will be charged at £9.15 each, but for expenditure purposes will be costed at £12 each). He thus understates the true profit if the proper computation were undertaken. He justifies that by saying that the rate of Mr Tonks …. could not have been reduced because Mr Tonks ... was an employee: but that was exposed as false at trial. I am therefore satisfied that Mr Hargreaves’ demonstration that the [1996 Contract] could not have been profitable at the adjusted rates does not stand scrutiny and that the contract would have been profitable even if the volume of work had remained constant. I estimate the reduction in costs over the contract term to have been of the order of £7000 (allowing for the replacement of 24 Lexan sheets per week, which seems to me the assumption on which Mr Hargreaves is working). That would have increased the profitability to about £35,000. But the probability is that the volume of work would not have remained constant. In the projections he prepared for Nu Weld Mr Hargreaves prepared calculations on the assumption that there would be a 20% increase in work under the [1996 Contract], and also on the footing that there would be a 40% increase in work. These assumptions were integral to his demonstration that the Nu Weld bid could be profitable. It is fair to assume two years of the renewed contract of £45,500 or thereabouts.”
[52]In fact, Mr Hargreaves’ valuation of the 1994 Contract, using the figures which he had included in Nu Weld’s tender, resulted in a profit of £70,250, rather than the £50,000 figure mentioned by the judge. However, the respondent does not cross-appeal on this point since its basic case is that the valuation exercise on which the judge was engaged was one which was inevitably a process of estimation rather than one based on arithmetical calculations.[53]The reasoning of the judge in paragraph 68 of the judgment is central to his eventual conclusion as to the value of the 1996 Contract, and as such it repays further analysis.[54]In paragraph 68 the judge rejects the cost-based (i.e. ‘bottom up’) approach to valuing the profitability of the 1996 Contract which Mr Hargreaves advanced at trial, concluding that it “does not stand scrutiny”. He does so essentially because it is entirely inconsistent with Mr Hargreaves’ own valuation of the 1994 Contract, which he made in the Autumn of 1995, and in which he used the £17.19/£12.25 figures (“the adjusted 1996 tender figures”). That valuation produced a figure of £27,934 (the judge rounds it up to £28,000). The judge then finds that even that figure understates the profitability of the 1994 Contract on the basis of the adjusted 1996 tender figures; and that the true figure, using Mr Hargreaves’ own method of valuation, should have been £35,000. The judge then increases the £35,000 by 30% to reflect his estimate of the increase in the amount of work which would be required under the 1996 Contract over that which was required under the 1994 Contract. That gave him the £45,500. (There is no challenge by the appellants to the 30% uplift.)[55]The judge then turns to consider the respondent’s ‘top down’ analysis, and concludes (in paragraph 69) that the £45,500 figure should be increased to £47,500: a relatively insignificant increase, bearing in mind the pleaded damages of approximately £100,000 and the figure of some £119,000 in the respondent’s Calculation of Loss.

The judge continues (in paragraph 69 of his judgment) :

“The [respondent’s] pleaded claim is for damages in the sum of £100,000. That is plainly excessive. The case actually opened at trial on alternative figures (to which I was not taken in detail) was that the profitability of the 1996 Contract on adjusted 1996 tender prices and assuming a 40% increase in volume was £4,500; though in closing this was amended to £66,000 by assuming a significantly increased element of light maintenance, an element omitted from the original submission. If the assumed 40% increase in volume were replaced by 30%, the higher figure would be reduced to £60,000. Accepting that even this degree of accuracy is probably spurious, I hold that on the balance of probabilities the [1996 Contract] would have yielded a profit to [the respondent] of £47,500 over two years.”
[57]On that basis, the judge assesses the damages at £19,000, representing 40% of £47,500.[58]In the remainder of his judgment, the judge dismisses further claims for damages made by the respondent. There is no cross-appeal by the respondent in relation to those claims.

THE GROUNDS OF APPEAL

[59]The appellants’ grounds of appeal are set out in paragraph 2 of Mr Tabachnik’s written skeleton argument, as follows:
“2.1 The Judge expressly declined to take into account a variety of heads of expenditure but for which the contract could not have been performed and which [the respondent has] by losing the contract been spared from incurring. On the Appellants’ calculations these heads of expenditure wipe out the £47,500 ascribed to the contract by the Judge. Accordingly, [the respondent] lost only the chance to lose money performing an unprofitable contract. The assessment of the contract’s value at £47,500 infringes the compensatory principle. 2.2 Given his conclusion that Nu-Weld’s and [the respondent’s] cost structures were materially similar, the Judge’s valuation of the contract at £47,500 is irreconcilable with his (correct and preferable) conclusion that Nu-Weld’s tendered figures “would not have enabled the contract to have been operated profitably.”
The two are irreconcilable because the figures which the Judge accepted should have formed the basis of [the respondent’s] bid are, applying his other assumptions, capable of producing additional income (over that which Nu-Weld’s tendered figures would have generated) of only about £12,400. 2.3 The Judge’s conclusions that Hargreaves should have advised Graham to tender at £17.25 per lexan sheet and at an hourly rate of £12.25, and that Graham would have accepted that advice, cannot stand if either of the preceding points is accepted. The Judge’s conclusions were founded on an assumption that such a tender price would enable [the respondent] to maintain its current profit margin. That assumption is undermined if either (1) the contract was unprofitable; or (2) potential net profitability was at most about £12,400.”

THE ARGUMENTS

[60]Mr Tabachnik submits, as he submitted to the judge, that in assessing the profitability of the 1996 Contract the cost of employing an additional manager must be brought into account. He submits that the passages in his cross-examination of Mr Graham quoted earlier in this judgment establish that an additional manager would have been needed, since Mr Smith’s time was already fully committed. Mr Tabachnik describes this evidence as “crucial” and “critical”, and suggests that the judge may have overlooked it. He submits that it establishes that the only way in which Mr Smith could be ‘freed up’ (as he puts it) would be for him to be released from managing other contracts for the respondent. As to Mr Graham’s answer, when it was put to him directly in cross-examination that the respondent would have had to employ an additional manager (“No, he [i.e. Mr Smith] would have done that.”), Mr Tabachnik submits that when the judge says, in paragraph 66 of his judgment, that the argument “still seems to me to be wrong”, the judge is impliedly rejecting that evidence. At the very least, he submits, there is no finding that the respondent would not have had to employ an additional manager had it won the 1996 Contract.[61]Mr Tabachnik takes issue with the judge’s reliance on the existence of the 25% uplift. He submits that his observations in relation to the 25% uplift make no sense. In particular, he submits, it is not clear whether the judge is saying(a) that the cost of employing an additional manager has already been brought into account once and should not be brought into account again, or(b) that in principle it should not be brought into account at all. In any event, he submits, it is clear from the judge’s other calculations that he has not in fact brought this cost into account. Mr Tabachnik submits that in the circumstances the judge’s reliance on the 25% uplift is misplaced.[62]Secondly, Mr Tabachnik submits that the judge was wrong to reject his submission in relation to what the judge described (in paragraph 67 of his judgment) as “multiple minor cost heads”. Referring to the Scott Schedule, in which the various heads of variable cost are listed, Mr Tabachnik submits that on the figures there set out (some of which, as he points out, were agreed by the respondent) bringing those variable costs into account would have reduced the value of the 1996 Contract to nil. Even if the judge had only brought into account those items which were agreed in the Scott Schedule, the value of the 1996 Contract would still have been substantially reduced. As it was, the judge left all these items entirely out of account.[63]Nor, he submits, was the judge entitled to disregard these items on the basis that they were accounted for by the 25% uplift. He submits that the judge should have made a finding as to what proportion of the 25% uplift would have to be incurred in order to operate the 1996 Contract profitably.[64]In support of the above submissions, albeit not as a separate ground of appeal, Mr Tabachnik relies on what he submits is a clear inconsistency between on the one hand the judge’s conclusions that Nu Weld could not have operated the 1996 Contract profitably on the figures contained in its tender and that the respondent’s operation and Nu Weld’s operation were comparable operations in terms of cost and efficiency, with, on the other hand, his conclusion that the value of the 1996 Contract was £47,500. To demonstrate this, Mr Tabachnik submits that if Nu Weld could not have operated the 1996 Contract profitably on the basis of a figure of £13.35 for replacing a Lexan sheet, the maximum profit which the respondent could have made by reason of its higher figure of £17.25 (a difference of £3.90), assuming 30% growth, would have been £12,411.36 (that is to say £3.90 multiplied by the number of Lexan sheets which were replaced in the course of the 1994 Contract, i.e. 2448, multiplied by 130%). He further points out that this assumes that Nu Weld would have broken even at the figure of £13.35, an assumption which the appellants do not accept.[65]Mr Tabachnik submits that if his earlier submissions are correct the judge’s finding (in paragraph 56 of his judgment) that Mr Graham would have accepted Mr Hargreaves’ recommendations as to the figures to be included in the respondent’s tender is fatally flawed. He submits that no sensible business man would in the ordinary course bid for a contract where the gross profit would be wholly or nearly eradicated by costs that he would have to incur to perform the contract, being costs which he would not otherwise have to incur; and that no employee could be expected to advise tender figures which would have this effect.[66]For the respondent, Mr George Thomas makes the general submission that the judge’s assessment of the value of the 1996 Contract depended, in part at least, on his assessment of the credibility of the various witnesses. Mr Thomas points particularly, in this connection, to the judge’s rejection (in paragraph 68 of his judgment) of Mr Hargreaves’ cost-based analysis, on the basis that it contradicted an earlier analysis which Mr Hargreaves had himself made. Mr Thomas submits that matters of credibility were essentially for the judge. He further submits that this court is not in a position to reconsider the evidence in any detail and should not attempt to do so. The judge was, he submits, engaged essentially on a process of estimation rather than arithmetical calculation, and on the material before him he was entitled to reach a figure of £47,500.[67]As to the cost of employing an additional manager, Mr Thomas submits that, far from rejecting Mr Graham’s clear evidence that it would not have been necessary for the respondent to do so, the judge impliedly accepted that evidence; and that in saying (in paragraph 66 of the judgment) “This argument still seems to me to be wrong” the judge was simply proceeding on the basis, contrary to his implied finding, that there would have been a need to employ an additional manager.[68]Mr Thomas submits that in any event, as the judge correctly observed in the penultimate sentence in paragraph 66 of the judgment, the 25% uplift reflected the fact that Mr Hargreaves and Mr Tonks had each spent 25% of his time managing the 1994 Contract.[69]Mr Thomas submits that the judge was correct to treat the salaries of administrative staff as fixed overheads. He points out that the task on which the judge was engaged was that of valuing the profitability of the 1996 Contract, as opposed to the effect which winning the 1996 Contract might have on the profitability of the respondent’s business as a whole.[70]As to the heads of cost listed in the Scott Schedule, Mr Thomas stresses that it was only when it came to the litigation that Mr Hargreaves sought to adopt the detailed cost-based approach to valuation which the judge in effect rejected, and that the judge’s observations on this approach at the conclusion of paragraph 65 of the judgment were fully justified. He points out that the disclosed documents revealed that, in devising the ‘scam’ referred to earlier, Mr Hargreaves had himself adopted a ‘top-down’ approach to valuation: a point which the judge makes in paragraph 68 of his judgment.[71]Mr Thomas also points to the inherent uncertainties in attempting to forecast the extent of the growth in work under the 1996 Contract. He submits that such a forecast can only be an estimate, and that adding precise figures to a round-figure estimate would, as the judge acknowledged, be a wholly inappropriate process which would arguably offend against the compensatory principle.[72]Mr Thomas accordingly submits that the judge was fully entitled to make the findings of fact which he made, and that his approach to the valuation of the 1996 Contract was one which it was fully open to him to adopt.

CONCLUSIONS

[73]The judge was faced with the difficult task of valuing the chance of being awarded the 1996 Contract which he had found to have been lost to the respondent by reason of the wrongful acts of the appellants. His task was made no easier by the fact(a) that he did not have the benefit of any expert evidence, and(b) that the parties advocated strikingly different approaches to his task.[74]Addressing himself to this task, the judge first assessed the extent of the chance that the respondent would have been awarded the 1996 Contract. This involved, inevitably, a degree of speculation. The judge, doing the best he could, assessed the chance at a round figure of 40%. No criticism is made of that conclusion, nor could it be.[75]The judge then turned to the second aspect of his task, viz. that of assessing the value of the 1996 Contract to the respondent had its 40% chance proved successful. Once again, this involved a degree of speculation, in particular in relation to the extent to which the work available under the 1996 Contract could reasonably be expected to exceed that which was required under the 1994 Contract. On this latter aspect, the respondent had contended for an increase of 40%, whereas the appellants contended for 20%. The judge concluded that it would increase by 30%. Once again, no criticism is made of that conclusion; nor could it be.[76]Against that background, I turn to consider the judge’s conclusions as to the value of the 1996 Contract, assuming a constant level of work as compared with the 1994 Contract.[77]The approach which the judge adopted to this issue is set out in paragraph 68 of his judgment, which I analysed earlier. Essentially, he rejected Mr Hargreaves’ detailed cost-based (‘bottom up’) approach and adopted the ‘top down’ approach advocated by the respondent. In my judgment, that was a choice which the judge was fully entitled to make, particularly in the light of his conclusions as to Mr Hargreaves’ credibility, and in the light of the evidence in the disclosed documents of the different approach which Mr Hargreaves had adopted in the contemporary calculations which he had made.[78]The next question is whether, on the approach to valuation which he had adopted, the judge was in error in not bringing into account the various heads of costs identified by Mr Tabachnik, and in particular the cost of employing an additional manager.[79]As to the cost of employing an additional manager, this was simply not an aspect which was sufficiently investigated in evidence. The only passages in the oral evidence which relate to it are those which Mr Tabachnik drew to our attention (and which I quoted earlier). In my judgment, even if one ignores Mr Graham’s specific denial that it would have been necessary to employ another manager, the evidence does not begin to establish such a need. Mr Graham’s acceptance that Mr Smith was “fully employed” seems to me to take the matter no further. But in any event Mr Graham’s specific denial seems to me to give Mr Tabachnik’s argument its quietus. To my mind it is plain, reading the whole of paragraph 66 of the judgment, that the judge was not rejecting Mr Graham’s evidence but accepting it. Certainly, had he rejected that evidence I have no doubt he would have said so in terms: and the suggestion that he overlooked the evidence on this point is simply fanciful, given the obvious care and attention to detail with which the judgment was prepared.[80]In any event, the judge was right, in my judgment, to conclude that the 25% uplift which had already been built into the tender for the 1996 Contract was intended to cover a proportion of the salary of two managers (as had the 25% uplift in the tender for the 1994 Contract).[81]As to the other heads of cost which the judge expressly left out of account, it seems to me that, having adopted the approach to the issue of valuation which he did, and having rejected Mr Hargreaves’ detailed cost-based analysis, the judge was fully entitled to leave them out of account. Such treatment was, in my judgment, fully in accordance with his approach to valuation.[82]As to the (as Mr Tabachnik would have it) inconsistencies in the judge’s conclusions, the judge did not elaborate on Mr Shimwell’s concession concerning the profitability of the 1996 Contract on the figures included in Nu Weld’s tender, nor was there any need for him to do so. In particular, it is not clear what Mr Shimwell meant by “profitability” in this context. I do not see any substance in the argument based on his concession.[83]It follows, in my judgment, that there are no good grounds for challenging the judge’s finding (in paragraph 55 of the judgment) that Mr Graham would have accepted Mr Hargreaves’ recommended figures (subject only to increasing the £17.19 figure to £17.25).[84]I would accordingly dismiss this appeal. In so doing, I would like to pay respectful tribute to the judge for the clear and meticulous way in which he tackled this complex issue.[85]I agree. I would like to associate myself with the tribute Lord Justice Parker has paid to the judge for his excellently crafted judgment[86]The appeal is therefore dismissed.

Order:

[1]The Appellants’ appeal be dismissed.[2]The Appellants to pay the Respondent’s costs of the appeal in the sum of £10,000.[3]The Respondent’s solicitors, Beasley Johnson Loyns, be immediately released from their informal agreement not to dispose of the sums plus interest paid out of court to the Respondent pursuant to paragraph 8 of the order of 29th October 2002, such sums having originally been lodged on behalf of the Respondent as security for costs in the action.[4]The solicitors for the Appellants, Reynolds Porter Chamberlain, do pay over to the Respondent’s solicitors forthwith the full value of the judgment debt and interest of £26,364.40, plus all interest accrued thereon since the date of judgment at the judgment debt rate, such interest being £1,831.78, such sums being held by the Appellants’ solicitors in accordance with their letter dated 27th September 2002.[5]The solicitors for the Appellants, Reynolds Porter Chamberlain, do pay over to the Respondent’s solicitors forthwith the sum of £25,000 plus interest accrued thereon, paid to them by the Defendants pursuant to paragraph 7 of the order of 29th October 2002.[6]Upon payment of the sums stated in paragraphs 4 and 5 above, the solicitors for the Appellants, Reynolds Porter Chamberlain, are hereby released from the undertakings to the court and to the Respondent in respect of the sums stated in those paragraphs.[7]The stay imposed by order dated 29th October 2002 in respect of any necessary steps in the execution of the judgment and/or detailed assessment of costs, be lifted immediately. (Order does not form part of the approved judgment)