Real World - Spring 2013: Damages include fall in market

by Dechert LLP

Two recent cases have highlighted circumstances in which damages for breach of contract may include loss caused by a fall in market values.

Hooper v Oates

In Hooper v Oates the Court of Appeal considered whether a claim for damages following a purchaser’s breach of contract for the sale of property should be based on the value of the property at the date of the breach or its value at a later date, following a significant fall in market values, when the vendor decided not to resell.

Mr and Mrs Hooper owned a freehold property in Cheshire. Mr Oates agreed to purchase the property for £605,000 in June 2008. Mr Oates failed to complete and Mr and Mrs Hooper accepted his repudiation of the agreement. The Hoopers then went on to re-market the property for a further 14 months without success. They subsequently let the property out for six months, before re-marketing it for a further six months, and ultimately moving back into the property themselves.

Due to the economic crisis in October 2008, the value of the property had fallen significantly during the intervening period. Expert evidence at the hearing valued the property at completion at £600,000 and by 13 September 2010 at £495,000. It was agreed that at the date of the hearing (in early 2013) the price had not changed from the 2010 valuation.

At first instance, Mr and Mrs Hooper were awarded £110,000 in damages, representing the difference between the contract price and the estimated open market value in September 2010. Mr Oates appealed on the basis that the damages should be assessed as at 30 June 2008, the date of the breach of contract.

The Court of Appeal unanimously upheld the first instance decision. Lloyd LJ stated that “it seems to me that the breach date is the right date for assessment of damages only where there is an immediately available market for the sale of the relevant asset or, in the converse case, for the purchase of an equivalent asset. This is most unlikely to be the case where the asset in question is land.”

Lloyd LJ also made it clear that, in circumstances where the defaulting party is the buyer, the decision as to whether to award damages on the basis of a later valuation date will much depend on the actions of the seller in response to the breach. In situations where the vendor does not resell, and has taken no steps to do so, the date of the breach may well be taken as the relevant date for assessment of damages, or a date soon after that on which the vendor is shown or taken to have elected to retain the property.

The advice to sellers is therefore to continue efforts to resell the property following any failure of the buyer to complete, and not to assume that they will be able to recover compensation from the buyer equivalent to any decline in market value following the breach as a matter of course.

In the Hoopers’ case, it was clear that they had taken significant steps to try to resell their property and there was no question raised over their efforts to mitigate their losses.

John Grimes Partnership Ltd v Gubbins

In John Grimes Partnership Ltd v Gubbins the Court of Appeal considered whether a consultant engineer should be liable for damages as a result of a fall in the value of a development following a breach of its contractual obligations.

Mr Gubbins obtained planning permission for the development of a field for residential purposes. In September 2006, he appointed consultant engineers John Grimes Partnership Ltd (“JGPL”) to design a road and drainage layout within the site and to obtain statutory approval for the road to be adopted by the local authority following completion. It was an express oral term of the contract that the work would be completed by March 2007.

The work was not completed on time and in April 2008 Mr Gubbins appointed another consulting engineer to complete the design of the development road. In June 2008 the redesigned road and drainage layout was approved by the local authority, 15 months after the original intended completion date.

JGPL invoiced Mr Gubbins for £2,893 of unpaid fees. Mr Gubbins refused to pay and JGPL issued proceedings. Mr Gubbins counter-claimed for amounts previously paid to JGPL on the basis that the work had been defective and had to be re-done. Mr Gubbins also sought £400,000 of damages for JGPL’s failure to complete the work by March 2007. He claimed that the 15 month delay in completion had resulted in a reduction in market value of the residential properties to be built in the development.

At first instance, the court found in favour of Mr Gubbins. JGPL appealed.

On appeal, it was not disputed that JGPL’s failure to complete the work on time had led to the reduction in the development’s value. The issue before the court was whether the losses caused by the breach of contract were too remote for Mr Gubbins to recover. JGPL contended that the judge at first instance had applied an incorrect test in relation to the question of remoteness.

The Court of Appeal upheld the first instance decision. It confirmed that, where there is no express term in the contract dealing with the losses for which a party is accepting liability in the event that it breaches the contract, there is an implied term that the party accepts responsibility for the types of losses which can reasonably be foreseen when the contract is entered into in the event of any breach.

The Court of Appeal accepted that the House of Lords’ decision in Transfield Shipping Inc v Mercator Shipping Inc (The Archilleas) [2008] had confirmed that there may be certain situations or markets where it could be shown that the parties could not have intended the defendant to bear liability for a particular loss, even though that loss was reasonably foreseeable. However, that decision had not displaced the standard approach of reasonable foreseeability.

The court concluded that losses arising from a fall in the property market were reasonably foreseeable by the parties when the contract was entered into. It had not been shown that there was some general understanding or expectation in the property world that an engineer in JGPL’s position would not be taken to have assumed responsibility for losses arising from a movement in the property market where there had been a delay in performing its obligations under the contract.

The court was also not persuaded by JGPL’s argument that it should not be liable for the loss suffered by Mr Gubbins as this was disproportionate to the price paid to JGPL under the contract.

Professionals should therefore be very wary of any liability they may incur as a result of a decline in the property market after the date on which the contract is due to be performed. In the event that the parties do not intend any particular loss to be recoverable following a breach of contract, this should be expressly set out in the contract, to minimise any risk of future liability for that type of loss arising.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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