Bulkhaul Ltd v Rhodia Organique Fine Ltd [2008] EWCA Civ 1452

[2008] EWCA Civ 1452

Case No A3/2008/0790

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

Venue ON APPEAL FROM LEEDS MERCANTILE COURT

HH JUDGE BEHRENS

5M006000

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

Date Thursday, 18 th December 2008

Before

LORD JUSTICE SEDLEY

LORD JUSTICE KEENE

LADY JUSTICE SMITH

Between

Bulkhaul LimitedAppellant

Rhodia Organique Fine LtdRespondent

(Transcript of the Handed Down Judgment of

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Mr Richard Millett QC (instructed by Messrs Addlestone Keane) for Appellant

Mr Paul McGrath (instructed by Messrs Burges Salmon) for Respondent

Hearing Hearing date : 11 December 2008

Judgement

[1]This is an appeal against the order of HH Judge Behrens made in March 2008 in the Leeds Mercantile Court. For the breach of a contract of lease and hire, the judge awarded the claimant, Bulkhaul Ltd damages of £161,158. Bulkhaul is dissatisfied with that award and appeals, with permission of Rix LJ.

[2]The appellant, Bulkhaul, is a large multinational tank transport company. It owns a fleet of about 12,000 tanks used for transporting chemicals. The respondent Rhodia Organique Fine Limited (Rhodia) is part of a large multinational organisation carrying on business as manufacturers of specialty chemicals. In March 1999, the parties agreed that Bulkhaul would lease to Rhodia 18 bespoke tanks for the transport of two highly corrosive chemicals, both forms of hydrofluoric acid (HF). The agreement was to run for ten years at a rent of £18.50 per tank per day. In October 2004, when the contract had run about half its course, Rhodia purported to terminate it. In December 2004, Bulkhaul accepted the repudiation.

[3]Bulkhaul began proceedings in June 2005. The main part of its claim was for damages for the whole of the unpaid rentals up to March 2009. A defence was filed but summary judgment was entered on liability in March 2006.

[4]On the assessment of damages, two main issues arose. First, Rhodia contended that certain sums fell to be deducted from the rental as expenses which Bulkhaul would have incurred had the agreement run its course but which would now not be incurred. The judge resolved those issues and his decision is not the subject of appeal. The other main issue was whether Bulkhaul had taken reasonable steps to mitigate its loss. It is that issue which gives rise to this appeal. Rhodia contended that Bulkhaul had not taken reasonable steps to mitigate its loss. The judge held that Bulkhaul, who had no remaining use for these tanks once this contract had ended, should have mitigated its loss by selling them. He considered that, if it had made reasonable efforts, it could have sold the tanks for £20,000 each within 3 years of the termination of the agreement. As it was, Bulkhaul had retained the tanks but they had a realisable residual value for which Bulkhaul would have to give credit. He held that the residual value was £20,000; he estimated that if the tanks were to be sold the costs of sale would be £2000 per tank so he deducted £324,000 (18 X £18,000) from Bulkhaul’s claim.

[5]Bulkhaul appeals contending that there was no satisfactory evidential basis to support the judge’s conclusions as to an available market for the tanks or as to the price the tanks would fetch on that market. Rhodia contends that the judge’s findings were open to him on the evidence.

[6]In order to consider those contentions, it is necessary to set out the history of events particularly those after Rhodia’s decision to repudiate the hire agreement. This is taken from the judgment which is accepted as accurate. Before dealing with the history, it is necessary to note that the judge accepted Bulkhaul’s contention that it was not in the business of selling tanks. Its business was that of leasing tanks. Although it was a large business, none of its regular customers produced HF. The bespoke tanks could not readily be hired out as part of its fleet. Moreover they could not be sold for any purpose other than the transport of HF.

[7]The tanks when new in 1999 cost Bulkhaul £25,000 each. They were manufactured from mild steel. They had an expected working life of 10 years, subject to proper maintenance. Because of the corrosive nature of the HF, the tanks would have no residual value (except as scrap) if used for 10 years.

[8]At some time in 2004, Rhodia decided to wind down its production of HF and, as a result, would have limited need for the tanks. They wished to withdraw from the contract with Bulkhaul. They discovered that one of their customers, Lanxess, might be interested in buying the tanks. It appears that Bulkhaul was made aware of the fact that Rhodia was seeking a way out and knew of a potential buyer because, in July 2004, there was an exchange of emails between two Bulkhaul employees in which the company’s attitude to selling the tanks was discussed. These show that Mr Gibson, Bulkhaul’s chairman, did not wish to sell them. The price of steel had risen and the tanks were not considered to be a depreciating asset. However, Bulkhaul would be prepared to sell the tanks at £27,000 each in their current condition.

[9]In September 2004, a representative of Lanxess inspected the tanks and made an offer to buy the tanks for 30,000 euros each. On 21st September, Mr Merfield of Rhodia indicated to Bulkhaul that it knew of a potential buyer (which he did not identify) who would be prepared to buy the tanks for £20,000 but that that was the maximum that would be paid. Bulkhaul refused that offer and proposed two options. Either the contract continued for the full term of 10 years or it could be terminated if Rhodia or a third party purchased the tanks for £27,000 each. It is important to realise that, at that time, the parties were not in agreement as to the terms of the hire agreement. Bulkhaul was contending that the agreement ran for a fixed term of 10 years; Rhodia was contending that it was terminable on reasonable notice. The proposed sale to Lanxess was to be on the basis that payment for the tanks would be in full and final settlement of any claim Bulkhaul would have against Rhodia for breach of contract.

[10]On 14 October 2004, there were further discussions when the third party offer to buy at £20,000 per tank was repeated and refused. Bulkhaul offered to sell at £26,000. That was not accepted and it appears that at this time Rhodia and/or Lanxess thought that the price was too high.

[11]On 19 October 2004, Rhodia terminated the hire contract with effect from 1 November. Two days later, Lanxess increased its offer to purchase the tanks to £21,000 but this was still refused. Bulkhaul accepted the termination as a repudiatory breach on 21 December 2004.

[12]It appears that, at some time in the first quarter of 2005, Lanxess bought some tanks from elsewhere and were no longer interested in buying from Bulkhaul.

[13]In evidence, Mr Gibson explained his reasons for refusing Lanxess’s offer. He said first that Bulkhaul did not know the company who was making the offer and, as HF is a very dangerous substance, it was reluctant to sell to an unknown purchaser ‘in case there were repercussions’. Also, as the offer to purchase was in full and final satisfaction of any claim arising out of the hire agreement, he considered that Bulkhaul would be losing about £240,000 if it accepted. Finally, he said that Bulkhaul suspected that Rhodia would make a secret profit out of the deal.

[14]By July 2005, proceedings had begun. Rhodia discovered another potential buyer in Thailand and communicated the interest to Bulkhaul. This came to nothing and no offer to purchase was ever made.

[15]In August 2005, Rhodia put Bulkhaul in touch with a Spanish company who might be interested in hiring the tanks for 6 months. Mr Gibson told the judge that this was hopelessly uneconomic as the cost of transporting the tanks to Spain was prohibitive for so short a hire contract. The judge accepted that.

[16]On 15 September 2005, Bulkhaul offered to sell the tanks to Rhodia for £20,000 each. The offer was couched in terms which made it clear that it was an attempt to reduce Bulkhaul’s claim against Rhodia. There was no reply until 29 September. When it came it was only a holding reply. By letter dated the same day, Bulkhaul wrote withdrawing its offer to sell. Bulkhaul’s explanation for the withdrawal was that it was considering leasing the tanks. It is not clear from the judgment whether Bulkhaul had some third party lessee in mind or whether it had in mind leasing to Rhodia. In October 2005, Bulkhaul proposed terms of settlement whereby Rhodia would pay the full rental value but would receive a five year lease of the tanks under which it could use or sublet the tanks on the best terms it could achieve. That offer was refused.

[17]It appears that no further attempt was made to sell the tanks until, in August 2007, Rhodia passed information to Bulkhaul about a potential purchaser in the Argentine. At this time, the trial of the action was approaching. When he gave evidence on the first day of the hearing, 17 September 2007, Mr Gibson claimed that he had been in touch with the Argentine company inviting it to view the tanks. At the end of that day, the hearing was adjourned for several weeks. The next day, Rhodia contacted the Argentine company to make enquiries as to whether Bulkhaul had issued such an invitation. It later received an email from the Argentine company to the effect that Bulkhaul had not been in touch. Rhodia’s solicitors then asked Bulkhaul for details of how the Argentine company had been contacted. Bulkhaul did not reply to that letter; nor did it adduce any evidence at the adjourned hearing to confirm Mr Gibson’s claim or to show that it had since been in touch with that company.

[18]Finally, there was evidence that Bulkhaul had been in touch with a South African company initially in March 2007 and latterly in January and February 2008, during the period in which the hearing stood adjourned. In March 2007, Bulkhaul sent the tank specifications to a Mr Valkenburg, who had expressed an interest in the tanks. In January 2008, Mr Valkenburg emailed Bulkhaul to say that there was renewed interest at a South African refinery. Bulkhaul replied that the tanks were still available. Mr Valkenburg wrote that he was interested in the purchase of three tanks and knew someone else who could be interested in others. He asked the price. Bulkhaul gave an indicative price of £27,000 each. Mr Valkenburg commented that the price looked high considering that new build tanks cost $50,000. He asked if the price was negotiable. Bulkhaul replied pointing out the advantage that these tanks would be available with minimal lead time. It added that ‘it would help’ if the buyer would consider all 17 tanks.

[19]At the trial, Mr Merfield of Rhodia gave evidence that, although the manufacture of HF had reduced in the Western hemisphere, it was still being produced, particularly in the Far East, and there was still a call for tanks for transporting it. The judge accepted that evidence.

[20]Mr Gibson accepted that, apart from reacting to introductions made by Rhodia, Bulkhaul had not taken any active steps to sell the tanks. So far as I can see there was no evidence of any other attempt to lease them either.

[21]The judge held that Bulkhaul had been under a duty to mitigate its loss, when making a claim for the full rental value. It was reasonable to expect it to make attempts to sell the tanks. That was because, if the contract had run its course, and the tanks had been used for HF for ten years, they would have been worth nothing at the end. Thus Bulkhaul would be in no worse position if it sold the tanks than if it scrapped them at the end of the contract. Although Bulkhaul’s usual business was the hire of tanks, that was not a reason why it could not have sold these.

[22]The judge rejected Bulkhaul’s submission that the tanks had no residual value and were in effect unsaleable. In giving his reasons for rejecting that submission, at paragraph 117 of his judgment, he said:

“First, a third party, Lanxess offered £20,000 for each of the tanks in late 2004. Second the tanks were manufactured with a life expectancy of 10 years and thus in the autumn of 2004 would be expected to have a further 5 to 6 years of use before they were scrapped. Third, I accept the evidence of Mr Merfield as to the state and extent of the HF market. Fourth, it appears from the 2004 discussions that the cost of new tanks had increased since 1999 thus increasing the potential value of second hand tanks. Fifth, the approaches that have been made between 2004 and 2008 are to my mind an indication that the tanks are not valueless. Sixth, although Bulkhaul has reacted to introductions made by Rhodia they have not been pro-active in attempting to sell the tanks. Indeed, the 2005 (I think he may have meant 2004) correspondence indicates that Bulkhaul are reluctant to sell the tanks. It would appear that on at least one occasion, Addlestone Keane (Bulkhaul’s solicitors) advised Bulkhaul that they did not need to sell the tanks. As already noted, Bulkhaul is a large company with many connections in the industry. Indeed, the recent evidence in relation to the Argentine company demonstrates that Bulkhaul are not making stringent efforts to sell the tanks. They were informed on 19 September 2007 that the invitation to view the tanks had not been received, yet they seem to have made no effort to follow this up between September 2007 and February 2008.”

[23]At paragraph 119, the judge concluded that the value of the tanks ‘was and is’ of the order of £20,000, as offered by Lanxess. He accepted that, if they were sold, there would be costs of sale which he estimated at about £2,000 giving a net value of £18,000.

[24]The judge then considered each of the specific respects in which Rhodia had alleged that Bulkhaul had failed to take reasonable steps to mitigate their loss. He accepted that they could not be criticised for rejecting Lanxess’ offer in late 2004. The contract had not yet been breached and Bulkhaul were under no duty to mitigate. Nor could Bulkhaul be criticised for refusing to sell the tanks to Lanxess in the short period between 21 December 2004 and the unknown date in early 2005 when Lanxess made alternative arrangements. Further, Bulkhaul had not been unreasonable in refusing the short term hire contract with the Spanish company and were not to blame for the breakdown of negotiations with Thailand.

[25]That said, the judge was critical of Bulkhaul is respect of the Argentine company; it should have followed up the inquiry more actively. In any event, Mr Gibson had admitted that Bulkhaul had done nothing proactive; it had only ever followed up Rhodia’s leads. The judge took account of the fact that Bulkhaul did not usually sell tanks. He acknowledged that the market was restricted because the tanks could only be used for HF. But he noted that Bulkhaul had many contacts in the tank and chemical industry. He accepted that it might take some time to sell the tanks but concluded that, if a more pro-active stance had been taken, Bulkhaul could have sold the tanks for about £20,000 each within 3 years of the date of breach. By failing to do so, Bulkhaul had failed to mitigate its loss. He then assessed the damages by reference to the net residual value of the tanks, which he had already assessed at £18,000.

[26]In this appeal, Mr Richard Millett QC for Bulkhaul accepted that the judge had correctly directed himself as to the law relating to the mitigation of loss. He had said that Rhodia bore the burden of proving that Bulkhaul had failed to take reasonable steps to mitigate its loss.

[27]Mr Millett’s complaint was as to the application of the law on the evidence before him. In particular, he criticised the judge’s assessment of the residual value of the tanks and to his finding that there was a market for the tanks. Mr Millett did not press the argument that he had advanced below, namely that the tanks had no residual value at all. He conceded that they did have a residual value but submitted that there was no evidence from which the judge could determine it. Moreover, there was no evidence from which he could conclude that there was a market for the tanks. He submitted that, in the absence of such evidence, the judge’s only available course was to award Bulkhaul the full rental loss as claimed.

[28]I must confess that I found that argument unattractive because, if right, it would mean that Bulkhaul could recover the whole of the rental and yet remain possessed of assets which it accepted were of some value, without, up to the time of trial, having made any positive effort to sell them. When viewed in the light of the evidence which suggested that it was anxious not to conclude a sale (viz the 2004 emails, the offers to sell at a high price of £27,000 and the shortness of the period it kept its £20,000 offer open) its position seemed to me most unattractive. However, Mr Millett submitted that the outcome he argued for was the necessary consequence of Rhodia’s failure to demonstrate that there was a market for the tanks at a particular value.

[29]At one stage, Mr Millett appeared to submit that the only way in which Rhodia could satisfy the burden upon it was by proving that there was an identified willing buyer at a specified price. He then seemed to disavow that contention but exactly to what extent was not clear to me. In any event, I do not accept the contention that the only way in which Rhodia could establish that there was a market for these tanks at a particular price was to identify a willing buyer at a specified price. In my judgment, a judge is entitled to infer the existence of a market from any sufficient evidence relevant to that issue. He is entitled to infer the value of goods from any sufficient relevant evidence of value. If the evidence is insufficient for a safe conclusion to be drawn on either issue, the outcome will be that the party who bears the burden of proof will fail. But a judge is entitled to draw inferences from direct evidence; it those inferences are properly drawn, his conclusions cannot be attacked.

[30]Here, Bulkhaul chose to call no evidence as to the existence or non-existence of a market, contenting itself with saying that the tanks could be used only for HF. Similarly, as to value, Bulkhaul called no evidence of its own. That it was entitled to do but the strategy has its dangers. There is a risk that the judge will have enough evidence from the opposition to reach a decision and the opportunity will have been lost to put in such evidence as could have been made available.

[31]At the heart of Mr Millett’s submission that there was no evidence of market or value was that the judge had been wrong to place any reliance on the Lanxess offer to buy at £20,000 in late 2004. That, he submitted, was completely irrelevant because the offer was made before the breach had occurred. I cannot accept that submission. It is one thing to say that a party cannot be criticised for refusing an offer before breach and quite another to say that the fact that the offer to purchase was made is of no relevance to the existence of a market or that the amount of the offer is of no relevance to the value of the goods. It matters not that the offer was made before the breach. The fact that the Lanxess offer was made shows that, at that time, there was a market at that price. In fact, the final Lanxess offer to purchase was at £21,000 per tank.

[32]Mr Millett complained that, by the date of breach, which is the relevant date for the assessment of value, the Lanxess ‘valuation’, such as it was, was out of date. I do not accept that. There was no evidence of a fall in value over the period between 2004 and 2008 and some evidence that it had not fallen. First, the tanks would depreciate with use but not merely on account of the passage of time. There was evidence (from the 2004 emails) that Bulkhaul believed that the tanks were not depreciating. They were in the best position to know. Further there was some evidence that the price of new tanks was rising (although not by a great deal) which would suggest that the second hand-price would hold up. Of course, demand is also relevant to second hand value and there was evidence that that had declined since 1999. It is not clear whether Mr Merfield accepted that by 2008, there had been any further decline since 2004 when Rhodia had decided to cut back its production of HF with a consequent reduction in its need for HF tanks. However, his evidence was that there was still a call for tanks for HF. The evidence that Bulkhaul asked the same price (£27,000) in 2008 as they had asked in 2004 suggests that they did not think that the second-hand value had diminished in that time. Thus, I can see no reason at all why the judge should not have taken the Lanxess offer into account as some evidence of market value in the period following the breach.

[33]Mr Millett also submitted that the judge had relied on only the Lanxess offer when assessing the existence of a market and the residual value. That is simply not so. There was other evidence which suggested the existence of a market. The judge accepted Mr Merfield’s evidence on the existence of a market and it seems to me that that was enough. There was also other evidence from which the judge was entitled to infer the value. He summarised the matters he had taken into consideration at paragraph 117, without setting out in detail each item of evidence relied on. Examination of the evidence he had previously mentioned shows that his conclusions were based on other evidence besides the Lanxess offer. First, as I have already noted, Bulkhaul had twice offered to sell the tanks at £27,000 each. The first occasion was in late 2004 when it offered to sell to Lanxess initially for £27,000, later reduced to £26,000. I accept that that offer was made at a time when the parties were trying to settle the whole dispute between them. But that does not alter the fact that Bulkhaul offered the tanks for sale to a third party at that price. If that offer to sell was made in good faith, it must be assumed that Bulkhaul genuinely regarded £27,000 as a fair asking price. By ‘in good faith’ I mean that the offer was not made at a deliberately inflated price so as to deter Lanxess from buying. The second occasion was in 2008 when £27,000 was the price quoted to Mr Valkenburg, in South Africa. When Mr Valkenburg asked whether the price was negotiable, the answer implied that it would only be if all the tanks were taken. The fact of those offers is relevant evidence of what Bulkhaul thought the tanks were worth. That evidence sits uncomfortably with its present complaint that the judge has over-valued the tanks at £20,000.

[34]There was other evidence relevant to value. In September 2005, Bulkhaul offered to sell the tanks to Rhodia for £20,000. The fact that it withdrew the offer after only two weeks does not affect the relevance of the offer as evidence of what the owners (presumably in good faith) thought was a fair asking price.

[35]Mr Millett says that the judge’s assessment of the residual value was arbitrary. I do not accept that it was. The judge recognised that the burden of proof lay on Rhodia to show that Bulkhaul had not acted reasonably to mitigate its loss. It is common ground that, if the tanks were realisable with the degree of effort which it was reasonable to expect Bulkhaul to make, Bulkhaul was obliged to give credit for their market value. The judge had decided that there was a market for these tanks and that, with reasonable effort, Bulkhaul could have sold them within 3 years of the breach. I do not think that the period of time was of significance. They could have been sold by the time of trial. They had not been, so Bulkhaul had to give credit for their market value. The judge then made the best estimate he could on the evidence to assess the market value. Mr Millett’s complaint that the assessment was arbitrary is just another way of saying that the evidence was insufficient. In my view, it was not. There was no precise evidence of a specific offer at a specific price but there was evidence from which the judge could estimate the price. He could include evidence of the price at which Lanxess had offered to buy (£20,000 rising to £21,000) and the price at which Bulkhaul had offered to sell (£27,000 falling to £26,000). Of course, if the judge thought that Bulkhaul’s offers to sell had not been made in good faith, in the sense I described earlier, he would not place as much weight on that higher figure as on the lower figures at which Lanxess had offered to buy. It may be that that accounts for the judge’s assessment of value at just below Lanxess’ final offer. In my view, the judge was fully entitled to conclude as he did.

[36]Mr Millett also complains that the figure for the costs of sale was simply plucked from the air. So it was but why was that? If Bulkhaul had wanted to contend that the costs would be greater than that, it could have called evidence to that effect. That was not a matter on which it could be said that Rhodia bore the burden of proof. In the absence of any evidence of the costs of sale, the judge might well have said there were none; then Bulkhaul might have had something to complain about. Instead the judge did his best to be fair to Bulkhaul by making some allowance for the costs of sale.

[37]In my judgment, Bulkhaul’s complaints about this judgment are unfounded. The judge was entitled to find as he did and, for that reason, I would dismiss the appeal. Lord Justice Keene: I agree. Lord Justice Sedley: I also agree.