Salford City Council v Torkington & Anr [2004] EWCA Civ 1646

Case No A3/2004/0585

[2004] EWCA Civ 1646

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

Venue ON APPEAL FROM MANCHESTER DISTRICT REGISTRY

(HHJ KERSHAW QC SITTING AS A

JUDGE OF THE HIGH COURT)

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date Thursday 9 December 2004

Before

LORD JUSTICE POTTER

LORD JUSTICE MANCE

LORD JUSTICE WALL

Between

SALFORD CITY COUNCILAppellant

(1) TORKINGTONRespondents

(2) & ANRRespondent

(Transcript of the Handed Down Judgment of

Smith Bernal Wordwave Limited, 190 Fleet Street

London EC4A 2AG

Tel No: 020 7421 4040, Fax No: 020 7831 8838

Official Shorthand Writers to the Court)

Mr N Berragan (instructed by the Solicitors’ Office, Salford City Council) for appellant

Mr A Gourgey QC and Mr I Foster (instructed by Messrs Berg & Co) for respondents

Judgment

Lord Justice Potter :

Introduction

[1]This is an appeal by the claimant Salford City Council (“the council”) from a judgment dated 1 March 2004 of His Honour Judge Kershaw QC sitting as a High Court Judge in favour of the defendants, the former tenants of shop premises let to them by the council. On an assessment of damages following an earlier trial on liability, the judge awarded the defendants judgment on their counterclaim in the total sum of £401,155.68, comprising damages of £181,111.26 together with interest thereon of £222,044.42. The council was ordered to pay the defendants’ costs of the action and counterclaim.

[2]The proceedings were started by the council by writ dated 7 December 1988 claiming forfeiture together with arrears of rent and mesne profits under a lease in respect of a local grocer’s shop at 180 Cleggs Lane, Salford. The defendants did not dispute that there were rent arrears and subsequently agreed the amount claimed by the landlord. However, pursuant to an amended defence and counterclaim dated 25 April 1989, the defendants counterclaimed inter alia damages for misrepresentation and breach of a collateral warranty which they set off against the rent. The council accepted for the purpose of the proceedings that the claim for damages could be set off. The original date fixed for trial of the action was 5 November 1990. However that date was vacated and in or about mid-1991 the action went to sleep. In April 2000 the defendants applied for directions, the council consenting, and the trial of liability on the defendants’ counterclaim was eventually heard by Judge Kershaw over three days in February 2001. The judge found for the defendants on liability and made directions for trial of the outstanding issues concerning quantum. That hearing took place on 15 and 16 July 2003, in the course of which the council conceded that damages on the counterclaim would inevitably exceed the arrears of rent so that the claim for forfeiture failed. The judge delivered a written judgment in draft dated 7 August 2003 endorsed to the effect that he expressed a provisional view formed after considering the submissions of counsel; however, since it did not accord exactly with the positions for which either was contending they were afforded the opportunity to comment. A further hearing took place on 2 September 2003 and final judgment on quantum was handed down in writing on 1 March 2004.

The Background Facts

[3]At all material times the first defendant was a businessman with a motor business in Bolton and other interests. The second defendant, who was the former manager of a wine store, lived with him. On 11 September 1981 the defendants took an assignment of the lease of a local grocer’s shop at 180 Cleggs Lane which is now surrounded by a large development called the Hay Mill Estate. The development was still under construction at the time and the shop was acquired by the first defendant as an investment and as a business for the second defendant to manage. 180 Cleggs Lane was opposite the entrance to the estate and in a prime position to serve its needs. It was a run-down business at the time with little of its lease remaining. However, the first defendant considered that the new development would revive the business in respect of which he proposed to obtain a new lease. There was to be one intended shop on the new estate, in a position close to the defendants’ shop, and the defendants were concerned as to its potential by way of competition. On enquiry from an officer of the council prior to the assignment, the council assured the defendants that the intended shop was being developed by the council to be leased by it as a fish and chip shop and there would not be any other shops on the Hay Mill Estate. In reliance on that assurance, the defendants completed the assignment of the tenancy which was due to expire by effluxion of time on 26 February 1982, but in respect of which the tenant enjoyed a statutory right of renewal.

[4]In fact, the shop on the Hay Mill Estate (2 Hay Mill Avenue) was leased by the council to a tenant as a grocer’s shop which opened on 7 March 1982.

[5]Nonetheless, the defendants sought a new tenancy pursuant to their statutory right and were granted a new lease of 180 Cleggs Lane on 21 January 1983 for a term of 6 years from 26 February 1982. The defendants intended to preserve their position and increase their trade by operating an off-licence as well as the grocery business. By agreement, the terms of their new tenancy permitted the shop to be used for the purpose of the “business of general grocers and off-licence”.

[6]Prior to the grant of that new lease the council had assured the defendants that the lease of the shop at 2 Hay Mill Avenue (by now operating as a grocer’s shop) did not permit use as an off-licence and that it would not compete with the defendants other than by its operation as an unlicensed grocer’s shop.

[7]There was in fact no restriction on user in the lease of 2 Hay Mill Avenue and, subsequently, that shop applied for and was granted an off-licence in competition with the defendants. 2 Hay Mill Avenue was closed for a period between 1985 and February 1986, but thereafter traded as an off-licence during the period January to March 1987 and then from 22 May 1987 onwards.

[8]Further, in April 1984, Salford County Council granted a 99-year lease of two proposed shops within a council development at 300 Cleggs Lane without imposing any restriction as to user of those shops. In February 1986 a general store opened at 300 Cleggs Lane. It later obtained an off-licence in December 1987.

[9]The result of the combined competition from the store at 300 Cleggs Lane and the off-licence at 2 Hay Mill Avenue was that the defendant’s profits declined between year ending April 1986 to year ending April 1987 from £17,000-odd to £2,000-odd.

[10]In June 1987 the defendants put the business up for sale. Based on the figures to year ending April 1986, the agents instructed to sell it valued the business at £65,000 plus stock. The reason for sale was stated to be:

“Our client has owned the business for over six years and is moving to another business venture.”

[11]It was the first defendant’s evidence that he had been contemplating selling because competition had caused sales and profits to fall and that the defendants finally made the decision because of the grant of the licence for Hay Mill Avenue.

[12]The judge found that the defendants ceased trading and closed their business on 14 February 1988 the position being that, “by mid-1987 the unlawful competition of the business at 300 Cleggs Lane and the new off-licence at Hay Mill Avenue took away any significant net profit and the position was apparent to [the defendants]”. They continued to occupy the premises for 15 months or so, but then moved out to a new home near Bolton. The first defendant throughout attended to his other business interests and the second defendant, following collapse of the shop business, became employed in one of those other businesses, rather than running the shop. The premises were abandoned unoccupied and liability for rent continued to accrue.

[13]Throughout the 1990’s, the area and the estate deteriorated and experienced considerable problems of vandalism. Nevertheless, the other shops continued in business and, in August 1992, a petrol station forecourt opened which sold provisions of various kinds in a ‘mini-market’.

Liability

[14]The judge held that each of the assurances given by the council (see paras 3 and 6 above) amounted to a collateral contractual warranty, first, in relation to the defendants taking the original assignment as proposed and, second, in consideration of their application for a new tenancy on the terms proposed. He said that, if he was wrong in law that there were collateral contracts on each occasion, the second assurance amounted to a representation on the basis of which the defendants entered into their new lease and were entitled to damages. He held that there had been breaches of each collateral warranty. Although he did not specify in terms the facts which amounted to breaches of those warranties and/or which rendered the second assurance false, there was no dispute as to the dates upon which the various rival businesses had commenced or that, by reason of such commencement, they competed with and adversely affected the defendants’ grocery and off-licence businesses so as to cause their closure. There is no appeal from these findings.

Quantum

[15]At the hearing on quantum, the judge dealt with the heads of loss asserted in ‘Bands’ agreed by the parties. The defendants’ witnesses were the first defendant and an accountant, Mr Cooper, who gave evidence as to the takings of the defendants’ business week by week between April 1982 and February 1988 which was not disputed. The claimants’ loss of turnover and profit due to “unlawful competition” during the period, as agreed between the parties or as found by the judge, (as to which there is no appeal), were as follows: Band 1: 7 March 1982 – 21 January 1983 £4,577 Band 2: December 1986 – 30 April 1987 £10,392 Band 3: 1 May 1987 – 13 February 1988 £29,035 Band 4: Loss on disposal of video tapes etc £2, 183 Total: £46, 187

[16]Bands 5 and 6 were “loss of income and value on continuing basis or closure basis” after 14 February 1988. It was the judge’s method of assessment in respect of Bands 5 and 6 which gives rise to this appeal.

[17]It was the evidence of Mr Cooper and the case for the defendants that, whereas at the date of closure of the business in February 1988 its value was nil, if it had not been for the breaches of warranty the business would still have been profitable and would have had a market value as at date of closure of £65,562 rounded down to £65,000 (paras 4.24 to 4.26 of Mr Cooper’s report). This figure was based on the figures to year ending April 1986 before 300 Cleggs Lane opened and 2 Hay Mill Avenue obtained its off-licence. Further, if the increased competition had not been in place and the business had continued trading, the level of profits in the future would have increased, if only because of inflation. He calculated the total net loss of profits to the date of his report in April 2002 at some £157,000, and attributed to the business a notional current value of £109,000 on the basis of the value in February 1988 inflated by the increase in the Retail Price Index.

[18]Mr Beard of KPMG, who did not give evidence but whose report was before the court, adopted the approach of Mr Cooper but disputed various of the figures. He considered that the value of the business based on trading up to year ending April 1986, was £30,000 which he reduced to £25,000 after deduction of £5,000 to recognise that, given the relatively low margins and reduced turnover, “it was not a particularly attractive business”. He suggested a notional value of £5,000 should be attributed to the business at closure on 14 February 1988.

[19]Mr Dawson of KPMG replaced Mr Beard as the expert witness for the council at trial following the latter’s departure from that firm. He broadly confirmed Mr Beard’s report, save in certain specific respects. He considered, on a somewhat different basis, the value of the business at closure on the basis of the trading up to April 1986 was at least £30,000. However, he accepted that on closure in February 1988 the tenants were “unable to dispose of the business and hence received no value”.

[20]As to the claim for loss on a continuing basis, the stance of the council was that no recoverable loss arose. Mr Beard considered that, given that the defendants had unsuccessfully attempted to sell their business in June 1987, that trade had dropped and that shops in the area had been subject to vandalism, there was no certainty that the defendants would have continued their business beyond February 1988 in any event, let alone to the date of trial. However, on the basis that the court might decide that there was a claim for continuing loss of profit beyond the date of actual closure, he attacked the calculations of Mr Cooper in some detail, declining to reach a final conclusion as to appropriate amount in the light of absence of information as to the first defendant’s opportunity to mitigate his loss. He also declined to attempt a notional value of the business as at an assumed trial date as a misleading exercise based on 14 year-old information in relation to which there would have been likely to have been significant and unpredictable changes (as well as uncertainty over competition) in the declining urban setting since 1988.

[21]The judge dealt with the matter in his final judgment on quantum as follows (references in brackets are to the relevant paragraphs of his judgment).

[22]As already indicated, he found that it was the “unlawful competition” from 300 Cleggs Lane and off-licence sales at 2 Hay Mill Avenue that drove the defendants’ business from profit into loss and caused them to close it.

[23]In relation to the likely continuation of the defendants in business the judge found that the defendants were aware of the advantage and opportunities to obtain a new tenancy available to them under the Landlord and Tenant Act 1954 (para 18) and that, by 1987 they had made the necessary application for a new tenancy on the basis that, if the application was made, they would be able to dispose of their business to better advantage to a purchaser. Nor was it suggested that the claimant would or could have opposed successfully the grant of a new tenancy (para 19). The judge dismissed the possibility which the defendants had canvassed before him that the council would have granted, or the court ordered, any term in the new lease affecting the council’s capacity as a landlord to allow or refuse to allow rival trading in other premises (para 20). He found that, had the application proceeded to court, the most likely outcome was that, by negotiation or by the court, a new tenancy would have been granted on terms broadly similar to those of the previous tenancy for a term of about six years at a similar rent to that being paid with a review after three years, but with no term of, or warranty collateral to, the new lease about competition from other premises (para 21).

[24]Assuming no breach of warranty, and therefore no ‘unlawful’ competition up to February 1988, the judge dealt with the likelihood of the defendants continuing in business in this way. He said: “I find that if the claimant had not been in breach of contract the defendants’ business would have been profitable in the period approaching the end of their 6 year tenancy. I cannot simply assume in the defendants’ favour that they would have been able to continue in business indefinitely with a lease on substantially the same terms. If they had continued in business others might or might not have sought to compete with them. This is a case in which both the defendants’ position and wishes and the hypothetical acts of others – the claimant (as landlord and as planning authority), the court (if the claimant and the defendant had not agreed on the terms of a new lease), licensing justices and possible competitors who would have had to assess whether to compete in the face of the defendants’ established business – must be taken into account.” (para 18)

[25]Having dealt with the likely grant and terms of a new tenancy commencing as at February 1988, to which I have already referred, the judge concluded: “It is also probable that with no breach of contract by the claimant prior to February 1998 the defendants would have continued to trade profitably under the terms of a new lease for a significant period.” (para 22)

[26]The judge then turned to Mr Cooper’s figures for continuing loss and the assumptions upon which they appeared to have been based, taking in also the various points which had been made before him as to their uncertainty. He said this: “… my task is not to calculate the loss, whether on the basis of Mr Cooper’s or any other assumptions, but to assess it. In doing so I have had regard, though not on a purely mathematical basis which would lend a spurious air of precision, to the following.(1) I understand that the rent for 2 Hay Mill Avenue was not increased for a period of 16 years, but Mr Cooper’s assumptions that the rent would necessarily have been £2,750 in February 1998 and that it would have remained at the same figure, whatever that was, year after year for 14 years may be, but may not be, realistic;

(2) that the opening of the petrol station forecourt which actually occurred in August 1992 would have occurred in the assumed circumstances of no breach of contract by the claimant before February 1998;

(3) that there might have been other competition after February 1998, whether or not it would have been ‘unlawful’ before then, either in the form of the use of premises which should not have been in competition with 180 Cleggs Lane or in the type of business carried on at Hay Mill;

(4) that the deterioration of the Amblecote Estate was progressive and in particular that it had started, and would have started to affect profits at 180 Cleggs Lane, well before the public meeting in October 1997;

(5) that if the defendants had been living at 180 Cleggs Lane in the early/mid 1990’s and Mrs Darby had been exposed by contact with customers to all the neighbourhood news and gossip, the defendants would have seen and sensed the problems of the Estate at an early stage and sold the business in correct anticipation that those problems would get worse;

(6) that the defendants were not dependent on the business at 180 Cleggs Lane for income because Mr Torkington had his motor business in Bolton and Mrs Darby had experience as an area manager for Cellar V Wine Stores before managing 180 Cleggs Lane, so she was clearly able to get a good job, either in one of Mr Torkington’s businesses (as she did) or elsewhere; and

(7) that the earlier they sold the business the sooner they would have lost any income from it but the better would have been its profit record and therefore the likely selling price.” (para 22)

[27]The judge then referred to the well known passage in the judgment of Stuart-Smith LJ in Allied Maples Group Limited v Simmons & Simmons

[1995] 1 WLR 1602

at 1609 H – 1611 E. He continued:

“24. In this case in order to recover damages for loss of profits for any period after the end of the original term of 6 years the defendants have to show that they would have been running the business. They would have held over until the terms of a new tenancy were agreed or fixed by the court, so for that period they were not dependant on the action of a third party. On my findings the risk of their not getting a new tenancy in due course, either by agreement with the claimant or from the court, was so slight that any discount would be too small to matter (if that is a reasonable idiomatic translation of de minimis). The length of time for which they would have run it and the income they would have received from it are matters which I must assess by the conventional approach of applying a multiplier to a multiplicand, and do not involve the valuation of a chance. In order to recover damages for the loss of what they could have obtained for the business as a going concern the defendants have in theory to establish that they would have found a buyer for the business, i.e. that a third party would have bought it. That does, as a matter of logic, depend on the chance of someone being willing to take over the business and pay for it. However almost everything has a buyer if the price is right. In my judgment the business notionally carried on by the claimants after 1988 would have had a market value in the first half of the 1990’s; any competition and any deterioration of the neighbourhood are matters to be taken into account in assessing the open market value of the business, and not by applying a discount to allow for the chance that the defendants might not have been able to sell it at all. 25. I must, therefore, assess how long the defendants would have continued to run the business, what profits they would have made and what they would have obtained for it on sale. 26. My assessment of the continuing profits is an average of £20,000 net … My assessment is that the defendants would have sold the business in 1994, probably after making the decision to sell sometime earlier and having to wait for the buyer. The decision to sell may well have been precipitated, consciously or unconsciously, by the opening of a –‘mini-market’ in August 1992 at the nearby petrol station … 27. I have to assess the value in 1994 of something which did not then exist: I have to value the defendants’ business in the early 1990’s on the basis that it had not been met by ‘unlawful competition’ prior to February 1988.”

[28]The judge then detailed the basis upon which he arrived at his valuation. It was finally assessed at a round figure of £25,000, plus a figure for stock of £32,000 and fixtures and fittings valued at £5,000: total £62,000.

The Grounds of Appeal

[29]Mr Berragan for the council submits that, in dealing with the matter as he did, the judge made two separate errors of principle when assessing the loss under bands 5 and 6. First, he submits that the loss should simply have been assessed as at the date of closure of the business, i.e. the difference between the value of the business at that date and its notional value assuming there had been no prior breach of contract. Not only does that represent the loss ordinarily and naturally resulting in such a case; he submits that it is also the fairest and most obvious way to take account of the innumerable uncertainties and contingencies which the business would in any event have faced after February 1988 c.f. the approach of Judge Crawford QC sitting as a judge of the High Court, approved by the Court of Appeal in ELO Entertainments Ltd v Grand Metropolitan Retailing Ltd [1999] 1 AER (Com) 473. In that case, the judge had rejected the submissions of the claimant that his loss should be assessed on the basis of expert projections as to the likely profitability of future trading over a period of 12 years on the part of a company running a discotheque. He stated:

“It is always difficult to seek to predict the future on any sort of mathematical basis. It did not seem to me that [the claimant’s accountant] made sufficient, or any, allowance for the uncertainties and imponderables which beset any business and perhaps this class of business more than many … The question for the court, as I have already observed in the course of this judgment, is what was the value of the business which the defendants brought to an end at the date of their breach of contract.”

[30]Stuart Smith LJ stated (at p.478):

“In my opinion, the judge was perfectly entitled to consider that the value put on the business by a willing buyer and a willing seller at the time was a much more reliable way of assessing the risks of this business.”

[31]Whilst acknowledging that, in that case, the Court of Appeal recognised that, in any given case, a choice is open to the judge as to the most suitable way of assessing the future loss (if any) suffered by a trader who is put out of business by another’s breach of contract, Mr Berragan submits that the uncertainties as to future trading in circumstances of open competition and in a declining neighbourhood, together with all the factors listed by the judge in paragraph 22 of his judgment (see para 25 above) were such that the correct approach was not to embark on the totally uncertain exercise in prediction which the judge effected, but to assess the amount by which the capital value of the premises and business was diminished by the breaches of warranty at the time the defendants ceased to operate it in February 1988.

[32]Further, and in any event, Mr Berragan submits that the judge’s approach to the assessment of future loss of profits beyond February 1988 by reason of the council’s breach and/or misrepresentation upon a multiplier/multiplicand basis was in error, given the uncertainties of the situation as to profitability which depended almost entirely upon the actions of others and uncertain outside circumstances. He submits that, if the approach of capitalising the value of the business as represented was not appropriate, then the proper basis of assessment for any claim for future loss of profits was that of ‘loss of a chance’ as elucidated in Allied Maples Group Ltd v Simmonds & Simmonds at 1609H – 1610C and 1611A-C. He points out that, in the judge’s draft judgment, as originally supplied to the parties, he appeared to accept that the loss of chance approach was appropriate in a passage in which he included in the circumstances of which he had to take account “what other businesses might have been started without breach of contract on the part of the claimant and what would have happened to the neighbourhood”.

[33]In the final judgment however that passage did not appear. The judge simply considered the same passage from Allied Maples and, having stated that no discount was necessary in respect of the risk that the defendants would not obtain a new tenancy in February 1988, said:

“The length of time for which they would have run it and the income they would have received from it are matters which I must assess by the conventional approach of applying a multiplier to a multiplicand and do not involve the valuation of a chance.”

[34]Mr Berragan also points out that, that statement at paragraph 24 of the judgment contrasts with the judge’s statement in paragraph 18 that:

“This is a case in which both the defendant’s position and wishes and the hypothetical acts of others … must be taken into account.”

[35]Mr Berragan submits that the judge, having assessed the likely continuing profits in the average annual sum of £20,000 net until a notional sale 6.5 years later at a price reflecting that profitability, should have applied a substantial discount to the resulting figure in order to take account of the uncertain position from February 1988 onwards, when other businesses could have competed without breach of contract on the part of the claimant, and a period of decline commenced within the neighbourhood generally.

[36]In particular, it is Mr Berragan’s submission that the notional continuing profit figure of £20,000 net per annum should have been discounted, if not eliminated, to take account of the probabilities of lawful competition from 26 February 1988. The uncontroversial figures showing the takings of the defendant’s business week by week are set out at paragraph 4 of the judgment and reveal that, by February 1988, the unlawful competition of the business at 300 Cleggs Lane and the new off-licence at Hay Mill Avenue had within the space of a year removed any profit from a business previously making £17,000-odd profit per year. 2 Hay Mill Avenue had opened as a grocery shop in March 1982. However this did not prevent the defendants from making a profit of £17,800 for year ending April 1986. It was the combination of 300 Cleggs Lane opening as a general store and 2 Hay Mill Avenue starting to trade as an off-licence in January 1987 which caused those profits to plunge to £2,000 for year ending April 1987 and to be swiftly eradicated thereafter. In those circumstances Mr Berragan submits that, even if competition from those two businesses or others like them could only ‘lawfully’ have commenced after February 1988 (the renewal date for the defendants’ lease), they would have rendered the defendants’ business unprofitable within six months.

[37]Thus, submits Mr Berragan, the judge was wrong to award a sum representing the notional value of a business sold as a going concern earning £20,000 per year profit 6.5 years on; it would have been made unprofitable by lawful competition well before that date. Mr Berragan submits that, even accepting (as he does) that £20,000 per annum was an appropriate annual figure to take for the level of profit prior to February 1988 had there been no breach of warranty, and even accepting (as he does not) that the judge was right to take a multiplier/multiplicand approach in respect of the future, the multiplier should have been no more than the period it would have taken for lawful competition to bite after February 1988. Yet there is no indication in the judgment that the judge made any discount for the effect of lawful competition when deciding on his multiplier of 6.5 ending in a notional sale in 1994.

[38]Alternatively, Mr Berragan puts it in this way. He submits that the judge’s chosen method of assessment led to recovery for consequential losses beyond the measure of damage prima facie appropriate for breach of a warranty in relation to the purchase of a lease or business, whether by reference to the law of contract or the tort of misrepresentation. In contract, in the case of a sale of goods, land or a business, the measure ordinarily applicable for a claimant/purchaser’s loss of bargain where what he receives is not of the quality promised yet is retained by the purchaser, is the value of the property as described or represented, less its market value in fact at the time of purchase. This may be accompanied by a claim for consequential loss provided such loss was within the reasonable contemplation of the parties at the time of contract and, subject to the duty of the purchaser to take reasonable steps to limit (mitigate) his damage either by rectification of any defect or, where the item is no longer profitable, by disposal and/or acquisition of a substitute: see generally McGregor on Damages (17th ed) paras 2-002, 2-011 and 2-026.

[39]Applying these principles, the council does not challenge the judge’s decision to award damages by way of loss of profit up to the stage where the business was proving unprofitable and the defendants had, with knowledge of the breach, decided to put it up for sale. However, Mr Berragan submits that, having ceased at that point to be profitable in their hands, the ceiling upon recovery should have been the difference between its value as warranted and its value as at March 1988 when the defendants ceased to operate it as a source of income or profit having already decided to sell it.

[40]Mr Berragan submits that the matter may equally be viewed as one of mitigation in that, having earlier taken a decision to sell the business as a going concern (see paras 10 and 11 above) and later ceased to trade rather than soldier on, there could be no benefit to the defendants in postponing a sale at whatever the market would produce. It was never made clear, having ceased to trade and then vacated, what (if any) steps the defendants took to dispose of the property once they moved out and the second defendant became employed in another of the first defendant’s businesses.

[41]Mr Berragan submits that the same conclusions would have followed if the judge had assessed damages, not in contract, but on the basis of a misrepresentation inducing the making of the lease (his alternative finding in respect of the second assurance: see paragraph 14 above). In a claim for misrepresentation under s.2(1) of the Misrepresentation Act 1967, the measure of damage is the same as in an action for fraud: see Royscot Trust v Rogerson

[1991] 2 QB 297

. In such a case, of course, the measure is not (as in contract) that which is necessary to put the claimant in the same position as if the representation had been true, but to put him in the position he would have been in had he never entered into the contract induced by the representation: see Chitty on Contracts vol 1 para 6-068. Equally, the test for causation (remoteness of damage) is based on directness rather than reasonable contemplation. Nonetheless the approach to the measure of damage in the case of purchase of an income-producing asset is essentially the same so far as questions of valuation and mitigation are concerned: see the position as stated by Lord Browne-Wilkinson in Smith Newcourt Securities v Scrimgeour-Vickers

[1997] AC 254

at 266G – 267C. That was a case concerning a share purchase in which it was stated to be a general rule that the normal measure of damage is the difference between the contract price and the actual value at the time of purchase. However, where the claimants had acted reasonably in retaining shares for as long as they did and in reselling them in the manner they did, they were entitled to base their claim upon the disposal value of those shares at a later date. While a claimant is entitled also to claim for consequential losses directly caused, normal principles of mitigation apply.

[42]In support of the judgment, Mr Gourgey QC argues that the judge was entitled not to deal with the assessment of loss on a ‘closure basis’, but to decide that, had there been no breach of contract, the defendants would have continued the business until they decided to sell much later in the face of declining profit and/or deteriorating conditions on the estate. He goes on to submit that paragraphs 18 and 22 of the judgment (as quoted at paras 24 and 26 above) show that, having done so, the judge was well aware of the nature of the task and the imponderables which he faced in approaching the problem of assessment in respect of a claim based on future loss of profits; he was nonetheless entitled to decide that such uncertainties did not prevent him from approaching the matter on a straightforward multiplier/multiplicand basis, having concluded that it was probable that, had there been no breach of contract prior to February 1988, the defendants would have continued to trade profitably under the terms of a new lease for a significant period (para 22). Mr Gourgey submits that it is quite wrong to suggest that the judge, when resorting to a multiplier/multiplicand approach, did not take into account all the various contingencies, because he specifically referred to them. He submits that Mr Berragan elevates the uncertain prospects as to how and when competition might have impinged adversely upon the defendants after February 1988 into an assertion of near certainty that the business would have become unprofitable within as little as six months. He says the judge was entitled to infer that the effects of it would not have been such as to cause the defendants to decide to sell up prior to 1994.

[43]That being so, Mr Gourgey submits that there is no warrant for asserting that the matter should have been approached on the basis of capitalisation of the loss at date of closure. The ELO Entertainments case makes clear that, where breach of contract causes the closure of a business, it is open to the judge so to resolve the matter, but does not suggest that it is obligatory. It was essentially a matter for the choice of the judge, provided he was satisfied on the state of the evidence that the future was sufficiently predictable.

[44]In this connection, Mr Gourgey notes that the defendants do not commit themselves to saying what the appropriate figure for compensation for loss of future profits would have been on a capitalised basis and that nowhere in the evidence was this addressed.

Discussion

[45]There are two preliminary points to be noted in relation to the appeal. First, that despite his fall-back finding that the council’s second assurance could be regarded as a misrepresentation for the purposes of the Misrepresentation Act 1967, the judge patently did not purport to award damages on that basis. He dealt with the matter throughout in the language of contract and there is no appeal from either side in that respect.

[46]Second, the judge having held (and there being no appeal on this aspect) that the lost profits up to the closure of the defendants’ business were recoverable as losses ordinarily and naturally resulting, the primary dispute at trial was (and the issue before this court is) whether the measure ordinarily applicable, namely a comparison of the value of the business as warranted and its real worth, fell to be assessed at the point immediately following closure, or whether it should be postponed indefinitely, so as to include in the award a substantial award for loss of future profits. It is only if the latter is the correct approach that the subsidiary issue as to the method of calculating the future losses (i.e. the ‘loss of chance’ issue) arises.

[47]In my view, the judge was wrong to deal with the matter as he did, broadly for the reasons advanced by Mr Berragan. The judge was dealing with the claim of defendants who, on the faith of a contractual warranty had acquired business premises as an investment, albeit for operation as a business. They did not rely upon any additional feature, special characteristic, or future intention made known to the council at the time of their proposed acquisition which might lead the council to assume that the business would be continued and/or disposed of on other than ordinary commercial considerations.

[48]The damages recoverable were those which were within the reasonable contemplation of parties in that situation. There is nothing to be gained by seeking to analyse the matter in terms of actual or imputed knowledge or the first and second rule in Hadley v Baxendale(1854) 9 Ex 341. The warranty given plainly related to the extent of the competition which the defendants would be likely to encounter in a business which depended upon the sale of food and drink within its catchment area. It was thus to be contemplated that, if the warranties proved false, the defendants would suffer loss of profits to an uncertain extent and over an uncertain period until the defendants either ceased trading or sold on their business. In those circumstances, as it seems to me, so far as remoteness of damage is concerned, the obvious cut-off point for any claim for loss of profits and the point at which damage fell to be assessed on a valuation basis was the point at which it was reasonable for the defendants, fully apprised of the adverse effects of the breach of warranty, to decide to cease trading and dispose of the business.

[49]As to the measure of the damages to be awarded, there was simply no reason not to adopt the normal contractual measure based on the value of the benefit of which the defendants had been deprived as a result of the breaches of warranty. Such value could only be measured at that point by evidence of the value of the defendants’ business as at that date, as to which the consensus of the expert evidence was plainly that such value was nil. Thus the measure and the ceiling of the defendants’ loss at closure was, on the valuation advanced by Mr Cooper, £65,000.

[50]It seems to me that, by opting to award damages on the basis that, had the warranties been true, the defendants would have traded on indefinitely, thus giving rise to a large claim for continuing loss, the judge(a) awarded a sum beyond the reasonable contemplation of the parties at the time the warranties were given, and

(b) ignored the reality that, as from mid-1987, the defendants contemplated disposing of their business rather than continuing it. In those circumstances the approach of the judge involved compensating the defendants for loss of future trade which the defendants had no intention of carrying on.

[51]The judge seems to have made the error of concluding that, once he had decided that the council were in breach of contract and that, in the absence of such breach the defendants would have carried on business into the 1990’s, he was obliged to measure the loss in the manner which he did. Having said at the beginning of paragraph 24 of his judgment that in order to recover damages for loss of profits for any period after the end of the original term of six years, it was necessary for the defendants to show that they would have been running the business, he appears to have treated that as conclusive of the proper measure of the defendants’ loss. For the reasons I have given, I do not think it was. If the defendants were entitled to claim £65,000 for loss of the business as a going concern as at March 1988, then there was no room for a claim for loss of profits thereafter.

[52]In the event, the judge made his own assessment of the value of the business at the date of its putative disposal in 1994 unassisted by any valuations by the experts as at that date. This leaves in doubt which of the experts he preferred as to the value of the defendants’ business on the assumption that the results up to 1986 constituted an appropriate basis for assessment. Having considered the reports of the experts, it seems to me that the valuation of Mr Cooper, broadly supported as it was by that of the selling agents instructed in 1987 on the basis of those results, is to be preferred. I would therefore hold that the measure of the defendants’ loss under Bands 5 and 6 was £65,000 as at March 1988.

[53]If I am wrong in that regard and the judge was correct to seek to award damages on the basis of the position as it would have been post-March 1988 had the warranties been fulfilled, I would nonetheless accept the submission of Mr Berragan that, in assessing the amount of that future loss, the judge was in error for making no sufficient allowance for the uncertainties of the position when he held that the length of time for which the defendants would have run the business and the income they would have received were matters “which I must assess by the conventional approach of applying a multiplier to a multiplicand, and do not involve the valuation of a chance”.

[54]Albeit, in the course of conducting the exercise thereafter, the judge referred to various possible contingencies and uncertainties to which he had regard in reaching the conclusions which he did as to the appropriate multiplier and multiplicand, he did so as part of the process of finding on the probabilities, the particular course which events would follow. He did not thereafter make any allowance, or reduction for the substantial possibility that events would follow a different course. The whole thrust of the judgment of Stuart-Smith LJ in the Allied Maples case is that where matters affecting the measure of loss are uncertain and, in particular, dependent on the hypothetical actions of third parties as well as the plaintiff, a balance of probability approach is inappropriate. The court is concerned to evaluate the chance that a particular course of events would have occurred and to look at the range of possibilities, making an appropriate discount in respect of the possibility that a less favourable result might follow. As made clear by Stuart-Smith LJ at 1614D:

“ … the plaintiff must prove as a 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 brackets should be.”

In my view this is such a case.

[55]I do not say that, in assessing the likelihood of future loss on a ‘loss of chance’ basis in a case of this kind, it may not be (indeed it often will be) a proper approach to start with a broad multiplier/multiplicand calculation addressed to the course of events which the judge considers likely on the balance of probabilities. However, where there are substantial unknown factors operating in relation to the acts of third parties or other events outside the control of the claimant, which raise the real possibility that a far less favourable course of events will occur, then a substantial discount should be applied to reflect the claimant’s true chances of achieving the level of profits claimed. That was not done here and it should have been. I reject Mr Berragan’s submission that, on any view, the forces of ‘lawful’ competition would have taken over so as to eliminate any realistic chance of profitable trading, beyond the short space of six months. On a broad brush basis and accepting the judge’s assessment of ongoing loss between February 1988 and April 1994 of £80,783 I consider that a discount of at least 50% would have been appropriate i.e. a reduction of approximately £40,400. However, in the light of the view which I take upon the first point of principle it is not necessary to say more.

Conclusion

[56]I would hold that the judge’s award of damages under bands 5 and 6 (‘loss of income and value on continuing basis or closure basis’) should be reduced to the sum of £65,000. Since the appeal has been argued largely as a matter of principle and without detailed reference to the relevant schedules of figures, including the detailed calculations of interest attached to the order following judgment, the consequences of the reduction stated will need to be the subject of agreement or submissions by counsel following the handing down of this judgment.

Lord Justice Mance:

[57]I agree with Lord Justice Potter’s reasoning and conclusions, and add only a few words of my own.

[58]This appeal concerns a claim for damages for breaches of collateral undertakings which led the defendants to take, first, an assignment on 11th September 1981 of a lease of a grocer’s shop at 180/180A Cleggs’ Lane, Salford due to expire on 26th February 1982 and, then, a new six-year lease expressed to expire on 26th February 1988. The defendants’ purpose in taking the new lease was to operate an off-licence as well as a grocery business. The collateral undertakings went directly to the possibility that competitive businesses could or would open in the area. Due to the council’s breaches of their undertakings, competitive businesses did open and the defendants’ business was in consequence rendered worthless and closed on 14th February 1988.

[59]However, pursuant to an application which must, as the judge indicated, have been made prior to August 1987 (cf Landlord and Tenant Act 1954 s.26(2)), the defendants had requested a new tenancy for a further period from 26th February 1988, apparently in order to maximise such value as the premises still retained. In the event, the defendants simply continued to reside in the premises for some 15months after the business closed, and thereafter they left the premises empty. It does not appear that any new tenancy was ever granted. In the circumstances it appears that the council could have terminated the continuing tenancy by giving between three and six months notice under s.24(3)(b) of the 1954 Act. The defendants could also have terminated it by giving not less than 3 months notice under s.27(2). Instead, the council by writ issued 7th December 1988 claimed rent arrears up to 29th September 1988 and forfeiture of the lease for failure to pay such rent. The judge at trial refused the council permission to amend their writ to claim rent after 29th September 1988.

[60]The judge found that, but for the council’s breaches, the defendants would have traded profitably for a further six years, until 1994, when they would have been able to sell their business profitably. In assessing the defendants’ net profits over this further period, he quite correctly made an allowance for rent that would have had to have been paid for the premises up to 1994. The question is, however, whether he should have measured the defendants’ loss on the basis of a continuing assessment of this nature, or whether he should instead have drawn a line at or around the time in 1988 when the defendants in fact lost the business which they had acquired as a result of the council’s inaccurate undertakings.

[61]Before us, as it seems before the judge, the parties’ submissions focussed on the business and its closure, rather than upon the lease. Hence the definition of the issue as being whether the defendants’ loss should be measured on a continuing basis, by assessing the business’s net profitability over a six year period ending in 1994, or by reference to the value which it would have had, in February/March 1988, if the council’s undertakings had been accurate, rather than broken. No argument was addressed before us to the fact that the lease did not end in February 1988, and that it might have taken the defendants some time after February 1988 to terminate or otherwise rid themselves of the lease, if they had decided to do so under s.27(2) of the 1954 Act or otherwise. The view may have been taken that they could in fact have terminated or disposed of the lease straightaway, and/or that, since they chose to continue to live at the premises there for some time, the lease had a benefit for them independent of the business. Be that as it may, the appeal was argued on the basis that there was a straightforward choice between an assessment of loss on a continuing basis and an assessment as at February/March 1988.

[62]Addressing this choice, in my view the loss suffered by the defendants should be assessed as at February/March 1988. The council’s breaches of collateral undertakings had by then rendered the business worthless, and neither of the defendants thereafter had any further business interest in or at the premises. The first defendant could forget about his financial interest in the business and devote his attention exclusively to his other business interests. The second defendant, who had been the active manager of the business, could involve herself, as she did, in another of the first defendant’s businesses. While the business at 180/180A Clegg’s Lane was continuing, loss fell to be assessed by comparing its actual results with those which it would have yielded, had the undertakings been accurate. The results which it would have yielded over that period form the basis for assessing the value which it would have had at the time of its closure, but for the breaches of undertaking. The assessment of that value as at February/March 1988, on the basis of those hypothetical results, necessarily takes into account the business’s future potential, including any risks likely to affect it. A calculation of loss on that basis (together with the interest which would fall to be added to it in any later judgment) would in legal theory provide the defendants with the amount necessary to enable them to embark on whatever other equivalent business activity they chose after the closure of the business in February 1988.

[63]The judge’s basis for assessing loss involved in contrast a continuing assessment of loss for a period of years long after the business had ceased. It was inherently speculative, since it depended on an attempt to derive, from the figures previously calculated in respect of years when the business was trading and from an analysis of actual events after 1988, potential profits in respect of years when the business was not trading at all. It then also involved an attempt, in the light of those entirely hypothetical matters, to assess the value which the business would have had in 1994, six years after the business had definitively ceased. During the six year period from 1988 to 1994, the judge in fact refused to award the second defendant any damages in respect of her 50% share of the business, because he considered that she had failed to mitigate her loss by finding alternative employment as from February 1988. However, he awarded the first defendant damages and interest in respect of his share, treated on a yearly basis, as from February 1988.

[64]In my view the correct approach would have been to treat both defendants as having suffered the final loss of their business as at February/March 1988, and thereafter as free agents to engage or not as they chose in other business activity, which might be more or less profitable than the business which the council’s breach of undertakings destroyed in February 1988. If the business did no better and no worse than the figures and facts as at February 1988 would lead one to expect, then the ultimate outcome of a calculation on the continuing basis adopted by the judge should in theory equate with the outcome arrived at if the loss was calculated finally as at February/March 1988 with interest thereafter (leaving aside any difference resulting from the law’s general refusal to add interest to loss on any but a simple basis). An entitlement to loss measured by reference to the value that the business would have had in 1988, together with interest, is firmly connected with the actual consequences of the council’s breaches on undertaking, namely the demise of the business which the council induced the defendants to take on and continue. It takes into account that it was in 1988 that the defendants were actually deprived of an asset which they could, but for the council’s breaches, either have realised then or have chosen to trade as they wished after that date. It avoids the speculative assessment, relating to their trading over the next six years and their ultimate assumed disposition of the business in 1994, upon which the judge embarked; and it can be rationalised on the basis that such a measure provides compensation sufficient to enable the defendants to have acquired and undertaken any equivalent income-yielding activity they chose after February/March 1988. In my view the judge should therefore have measured loss in this case as at February/March 1988, and the appeal should be allowed accordingly with the result that Potter LJ has proposed. Lord Justice Wall:

[65]I agree with both judgments and do not wish to add anything.

ORDER:

[1]Appeal allowed.

[2]The sum awarded by His Honour Judge Kershaw QC in his Order dated 1 March 2004 by way of damages in favour of the Defendants be reduced from £181,111.26 to £103,318.25

[3]The parties are to lodge by 12 January 2005 an agreed schedule showing the consequential adjustments to be made to the said Order including an adjustment to the sums payable by way of interest and (if appropriate) costs pursuant to CPR Part 36.

[4]Permission to apply in default of agreement

[5]The Defendants pay the Claimant’s costs of the Appeal, to be subject to detailed assessment in default of agreement, such costs to be set off against costs awarded to the Defendants under the said Order of HJ Kershaw QC. (Order does not form part of approved Judgment)