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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Watts v Bell & Scott WS Solicitors [2007] ScotCS CSOH_108 (22 June 2007)
URL: http://www.bailii.org/scot/cases/ScotCS/2007/CSOH_108.html
Cite as: [2007] ScotCS CSOH_108, [2007] CSOH 108

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OUTER HOUSE, COURT OF SESSION

 

[2007] CSOH 108

 

A52/03

 

 

 

 

 

 

 

 

 

 

 

OPINION OF C.J. MACAULAY, Q.C.

(sitting as a Temporary Judge)

 

in the cause

 

JUSTIN ALEXANDER WATTS

 

Pursuer;

 

against

 

BELL & SCOTT W.S., SOLICITORS

 

Defenders:

 

 

­­­­­­­­­­­­­­­­­________________

 

 

Pursuer: Murphy, Q.C., Robertson; Semple Fraser

Defenders: Campbell, Q.C., Young; Balfour & Manson

 

22 June 2007

 

Introduction

[1] In this action the defenders admit liability to make reparation to the pursuer in respect of any loss and damage sustained by him as a consequence of the defenders' failure to timeously intimate an offer for the purchase of heritable property which the pursuer intended to develop. The essential question raised is whether the pursuer can recover the loss of profit he claims he would have made had he been able to develop the property.

[2] The essential facts behind the defenders' potential liability to make reparation to the pursuer can be simply stated. The defenders, at the relevant time, were the pursuer's solicitors, and were instructed by him to submit an offer to purchase premises at 32 and 34 Abercromby Place, Edinburgh ("the premises") then belonging to the Caledonian Club (the "club"). A written offer dated 14 May 2002 in the sum of £1.05 million was submitted by the defenders to the selling agents, DM Hall. In response to that offer, DM Hall fixed a closing date for 12 noon on Friday 21 June 2002. In the offer the price stipulated was £1.05 million. In the course of the morning of 21 June, the pursuer, by telephone, instructed the solicitor dealing with the transaction to increase his offer to £1,100,000. DM Hall agreed that a timeous offer by fax prior to the closing date, if followed by a "proper" offer, would be acceptable. Per incuriam the fax to that effect was sent to the pursuer's own fax number and not to that of DM Hall. At that time the pursuer was on holiday and unaware of the error. The faxed offer was therefore not received by DM Hall prior to the stipulated closing time. The back-up offer was received late the following Monday. Although seven other offers for the premises were received, the pursuer's offer of £1,100,000 would have been the highest offer by some £43,000. The premises were in fact sold to Plum Developments Limited as the highest bidder who had made a timeous offer.

[3] Although in the course of the proof the parties joined issue on whether or not the pursuer's offer would have been accepted if it had been timeous, Mr Campbell, Senior Counsel for the defenders, in his submissions accepted that the evidence did demonstrate that the pursuer's offer would probably have been accepted since it was the highest offer and the pursuer would have been able to raise the necessary finance and reach agreement with the sellers in relation to the conditions set out in his offer. In light of the concessions made I propose to proceed on the basis that the pursuer would have successfully concluded a bargain for the purchase of the premises.

 

Basis of this action
[4
] The pursuer contends that he intended to develop the premises and to convert the premises into separate flats. He sues the defenders for the loss of profit he claims that he would have made from that development. For reasons that will become evident later, the defenders contend that the pursuer has suffered no loss for which they are responsible. The defenders also advance an alternative method of calculating any loss of profit that the pursuer may have suffered as a consequence of the defenders' failure.

[5] The pursuer's action is based on contract. In his pleadings he avers it was an implied term of his contract with the defenders that in implementing his instructions the defenders would use the skill and care of a reasonably competent solicitor and by failing to deliver his offer for the premises timeously, they are in breach of that implied duty of care. Although the defenders do not dispute that they were in breach of contract they do dispute that any legally recoverable loss stemmed from the breach of contract.

 

Witnesses

[6] I heard the evidence of the pursuer himself. The following witnesses were also led on behalf of the pursuer:

(i) Richard Henry Kingsford Watts. Mr Watts was the father of the pursuer and was led primarily to say that financial support was available to the pursuer from the family company to support a development proposal.

(ii) David Neil Ferguson. Mr Ferguson was a solicitor and also the chairman of the Caledonian Club. His evidence was directed towards explaining the reasons why the pursuer's late offer for the premises was not accepted. He also gave evidence as to what the position might have been had the pursuer's offer been timeous.

(iii) Nancy Jamieson. Mrs Jamieson was a town planner with City of Edinburgh Council. She was the principal planner of the Development Quality Listed Building Section. She and her team dealt with applications for planning permission and listed building consent in the city of Edinburgh. She gave evidence on the prospects of the development proposed by the pursuer obtaining planning permission and the timescales that might be involved. The one particular aspect of her evidence that was of some importance was whether or not the pursuer would have obtained planning permission for the full extent of his proposed development.

(iv) John Murdo MacLeod. Mr MacLeod was a chartered accountant. The pursuer was one of his clients. He gave evidence about the tax consequences that might ensue depending upon which development vehicle the pursuer chose in connection with his proposed development.

(v) Alexander Talbot Cliff. Mr Cliff, like the pursuer, was a property developer, and carried out his property developments with the corporate vehicle of Plum Developments Limited. It was Plum Developments Limited offer that was eventually accepted by the Caledonian Club for the premises. Mr Cliff gave evidence on the type of development that was carried out by that company. He also made certain observations in connection with the development proposed by the pursuer.

(vi) Ross Alexander Mackay. Mr Mackay was a solicitor and the purpose of his evidence was to provide evidence on those aspects of quantum relating to legal fees that might have been incurred in connection with the purchase of the premises and subsequent sales.

(vii) Iain Francis Hannon. Mr Hannon was a chartered surveyor in the firm of J&E Shepherd. The pursuer had contacted him prior to his initial offer for the premises in order to instruct him to carry out a survey of the premises. He did so, and provided the pursuer with a verbal valuation as to the market value of the premises prior to the submission of the pursuer's offer.

(viii) Stephen David Craig. Mr Craig was also a chartered surveyor and employed by Hardies First Surveyors Scotland ("Hardies"). He was asked to prepare a desktop review/valuation of the premises by the pursuer's solicitors for purposes of this litigation. He was asked to advise on the open market value of the flats in the proposed development.

(ix) Derek Mackay Ferrier. Mr Ferrier was a quantity surveyor and project manager also in the employ of Hardies. Mr Ferrier prepared outline drawings and costings based on these outline drawings in connection with the proposed development of the premises.

(x) Michael James Mutch Macdonald. Mr Macdonald was a corporate relationship manager with HBOS plc. At the relevant time he was the pursuer's bank manager. He was led on behalf of the pursuer to support the pursuer's contention that he would have been able to finance the development of the premises. That aspect of his evidence became non controversial. He also gave evidence on what the position would have been in the event of overlapping developments.

[7] The defenders only led one witness namely Caroline Docherty. Ms Docherty was a partner in the defenders and, at the relevant time, acted as the pursuer's solicitor. She bore direct responsibility for the error that subsequently occurred.

 

The pursuer's business

[8] The pursuer, who was aged 33 at the date of giving his evidence, described his occupation as that of property developer, entrepreneur, and property investor. After leaving university with a degree in civil engineering he started a business called Central Letting Limited. That business engaged in the purchase of properties for rental purposes and also the management of properties let out by others. This was a business that he developed over the years and eventually sold in November 2003 for about £1.25 million. In addition to his rental business the pursuer also, in about 1994 or 1995, began to develop properties for sale.

[9] As at June 2002, so far as property development was concerned, the pursuer's focus was primarily on Edinburgh New Town Georgian properties. In particular, he had completed developments at 28 Nelson Street, 39 Heriot Row and 2 Abercromby Place, Edinburgh prior to June 2002. That is why he was interested in purchasing the Caledonian Club premises in Abercromby Place in the heart of the New Town. Prior to June 2002, the purchase of property at 39 Heriot Row for £427,807 represented the largest investment of money expended by the pursuer on any single property. However, the property at 28 Nelson Street, although purchased subsequent to Heriot Row and at a price at £416,757, was in fact being developed, at least for part of the time, along with the property at Heriot Row. For part of that time property at 13 Cornwall Street (purchased for £145,000) was also being developed.

[10] It was clear to me that the pursuer, in the years prior to the submission of his offer for the premises, had had a successful track record in the property development business. He was plainly someone who possessed business acumen. He was in the process of moving up the scale of values for development. Mr Campbell conceded in the course of his submissions that he did not dispute the pursuer would have been able to finance the purchase of the premises and its subsequent development, even although the development of the premises as a single unit in monetary terms meant that as a property developer the pursuer was moving on to a higher level.

 

The initial offer
[11
] Shortly before the premises became available for sale the pursuer attempted to become a member of the club. He was accepted as a member, but at that time the club committee were considering whether or not to continue with the club, or to dissolve it, and until that decision had been made, his membership could not be confirmed. The pursuer discovered that the club intended to sell the premises and were going to use DM Hall as the marketing agents. On making that discovery, the pursuer, in April 2002, obtained the plans for the premises from DM Hall. The plans allowed the pursuer to make an assessment of the gross internal area of the premises which he concluded was in the region of 9,200 sq.ft. This allowed him to make an assessment of the potential profitability of the developed premises.

[12] The pursuer also instructed J&E Shepherd to provide him with a valuation of the premises. On 24 April 2002 Mr Hannon of that firm inspected the premises and provided a verbal report to the pursuer that the premises could be valued at about £1.1 million.

[13] It was following that valuation that the pursuer submitted his offer 14 May 2002 for £1.05 million. The pursuer in his evidence described his offer as being a "pre-emptive offer".

 

The pursuer's credibility and reliability

[14] Along with the written offer the pursuer through the defenders also submitted a document headed "Submission and Background information re Offer - Caledonian Club premises". The pursuer explained that the purpose behind that document was to convince the club not to put the premises on the market and to accept his offer. In that document the pursuer made a number of representations which were untrue. At the top of page 3, having explained that the premises had been valued by a "respected firm of Edinburgh Chartered Surveyors", and under the heading "Valuation", the following statement is made: "Based upon current information and my research my offer represents in excess of a 20% premium on this valuation". In fact his offer was less than the valuation he had obtained from J&E Shepherd. By way of explanation for the claim that his offer was in excess of 20% of valuation the pursuer suggested in this document that he had been for some time looking to acquire a building in the New Town in order to convert part for his own residence and that the premises would allow him to do exactly that by utilising one of the residential units for that purpose. There was also a statement to the following effect: "From a residence perspective I have an option on another building in the locality which is likely to expire prior to the club being finalised on the market and closing dates set. Hence the necessity to get decisions soon." Again that was untrue and designed to mislead the club. Another of the statements made was in the following terms: "In addition I have two other development opportunities in consideration at this time for my development funds and again these opportunities have timescales which require early decisions". That also was untrue. The pursuer also offered the club the "real possibility" that the premises could be developed and the ground floor of that part of the premises that formed number 32 could be used to form "a new renovated private club". That was not part of the pursuer's plans.

[15] The pursuer had to accept that the document he submitted to the club contained a number of deliberate untruths designed to mislead the club to its cost and to his benefit.

[16] Although the document was submitted along with the pursuer's offer by the defenders, it was the pursuer's own document and I am satisfied that the defenders, Miss Docherty in particular, although fully aware of its contents, was not aware of the deliberate misrepresentations contained within it.

[17] As it turned out, the club did not succumb to the pursuer's misrepresentations and marketed the property in the usual way. Furthermore, as a matter of principle the club refused to consider the pursuer's late offer even although it bettered the next highest offer by about £43,000.

[18] Mr Campbell submitted that having regard to that history the pursuer was someone who was prepared to lie in order to achieve his objectives. He submitted that the pursuer's evidence should only be accepted if non-controversial or if supported by other credible and reliable evidence. Mr Murphy, Senior Counsel for the pursuer, argued that the pursuer's conduct simply reflected commercial reality in the world of property development where developers might seek to persuade prospective sellers not to market property. He submitted that the fact that the pursuer was prepared to deceive the club did not mean that he would tell lies on oath.

[19] The pursuer is certainly to be criticised for his attempt to mislead the club to its detriment. That is certainly a factor that I have to consider in assessing his credibility and reliability. There are perhaps three main areas of the evidence that remain particularly controversial. Firstly, whether the subsequent purchase of Albany Street, Edinburgh was effectively a substitute or alternative development to the development of the premises. Secondly, the nature of the development that the pursuer would have carried out had he been successful in obtaining the premises and the likely profitability thereof. Thirdly, the nature of the development vehicle that the pursuer would have used had he been successful in purchasing the premises. I have approached these important aspects of the evidence by satisfying myself that the pursuer's evidence did obtain satisfactory support from other evidence, not because the pursuer in relation to these aspects of his evidence was deliberately seeking to mislead the court, but as a touchstone of the veracity of his approach. I do consider that in certain parts of his evidence that I shall consider later, the pursuer was somewhat optimistic as to what he might have achieved. Having said that, the difficulty for the pursuer was that his thinking as to what he might do with the premises was in an embryonic stage in June 2002. Consequently the exercise he embarked upon was a hypothetical one essentially for the purposes of this litigation. The reality of the situation is that at the time his offer for the premises was made he had not reached any real conclusions as to the nature of the development. That being the reality, the precise nature of the development that he maintains now he would have carried out, the timescales involved and the profit that he might have generated therefrom, have to be approached with some caution.

 

Albany Street - a substitute

[20] An important issue was whether the pursuer would have been able to manage the development of the premises and also acquire other premises for development purposes. This issue becomes important when considering whether or not the pursuer suffered any real loss as a result of his failure to purchase the premises. This issue arose because, in the timescale during which the pursuer envisaged the development of the premises would have taken place, he was able to purchase premises at Albany Street, Edinburgh for £1,739,000. The defenders argued that Albany Street was, in effect, a substitute for the premises and that the pursuer could not prove he had sustained any real loss in his failure to acquire the premises. The main thrust of this argument was that the pursuer would not have been able to finance both projects.

[21] In the pursuer's offer for the purchase of the premises the entry date was stipulated to be 1 October 2002. The pursuer maintained that the development would have been completed, and the residential units created in the course of the development sold, by the end of October 2003. The pursuer's offer for Albany Street was dated 30 January 2003 but the missives in respect of Albany Street were not concluded until 11 April 2003. However, although the missives in respect of Albany Street were concluded in April 2003, entry and vacant possession was not to be given prior to September 2003, and no later than July 2004. The reason for such a protracted entry date was due to the fact that the sellers of Albany Street, Hanover Housing Association, were having new offices built and required to have sufficient time available for that to be achieved prior to leaving Albany Street. The date of entry was eventually agreed as 19 January 2004. Part of the Albany Street premises, number 36, was in fact acquired by the pursuer as his own home and paid for out of funds he received from the sale of his Central Letting Limited business. The balance of the cost for the purchase and the development of Albany Street was financed by the Bank of Scotland.

[22] In order to have carried out the development of the premises, the pursuer would have required to have obtained a facility from his bank of about £1.6 million. It was clear from the pursuer's bank manager's evidence, Mr MacDonald, that such a facility would have been offered to him, and in any event the defenders no longer disputed that that would have been the case. In order to develop Albany Street, the pursuer required a facility of £1.59 million from the bank. With a potential date of entry for Albany Street in about the latter quarter of 2003, and at a time before the development of the premises had been completed, there was a risk that there would have been an overlap in the two developments. The pursuer was confident that he would have been able to obtain funding for both developments and that there would be little overlap in the two developments had he been successful in purchasing the premises.

[23] Mr MacDonald, the pursuer's bank manager, was also reasonably confident that the bank would have supported the development of Albany Street even if the pursuer had acquired the premises. The bank may have stipulated additional conditions such as the installation of a project manager to oversee the Albany Street development and would have had to be satisfied that the overlap period between the two developments would be as small as possible.

[24] The pursuer's projected programme for development of the premises was that the development would be completed in a thirteen month period from the beginning of October 2002 to the end of October 2003. That sort of programming was consistent with previous developments, and in particular, with the development of the premises at Heriot Row, Edinburgh. The pursuer was confident that, even although the premises were larger than the Heriot Row premises, the thirteen month programme could be complied with simply by having more men involved in the development. His programming depended upon the first flat in the development being sold in about April 2003.

[25] Having acquired the premises for development by Plum Developments Limited Mr Cliff was in a good position to comment on the pursuer's programming. In his examination in chief Mr Cliff considered that a sale of the first unit in about April 2003 was "tight but possible". In cross examination Mr Cliff indicated that the pursuer's programme assumed that there were no hold-ups during the development. His expectation was that there would be some hold-ups. As an example he said that in the course the development carried out by Plum Developments Limited some rot was discovered in the roof. That was the kind of discovery that might hold the programme up. He described the pursuer's proposed programme as a target but the sort of target that most developers would be prepared for slippage of about two or three months. On this issue I do consider that the pursuer was being optimistic in considering that he would have completed his proposed development in the thirteen month period that he contended for and I accept the more practical approach taken by Mr Cliff that as a matter of likelihood there would be slippage in the programme. That would mean that in relation to the possible entry date for Albany Street being in the latter part of 2003 that there probably would have been a greater degree of overlap between the development of the premises and the potential development of Albany Street than contended for by the pursuer and assumed by Mr MacDonald. Later I shall return to this issue when considering the quantum of damages.

[26] However, although I am satisfied there would have been some slippage in the pursuer's programme had he acquired the premises in October 2002, I am quite satisfied that in the circumstances the pursuer would have been able to persuade his bank to provide the finance necessary to purchase Albany Street in addition to the financing of the development of the premises. The relevant time for that decision would have been when the pursuer offered for Albany Street in January 2003 with a projected entry date, at the earliest, being in September 2003. Even if the bank considered that there would be some overlap, I do not consider that the bank would have viewed the risk of overlap as being of sufficient significance as to dissuade it from supporting the pursuer in the Albany Street project. The bank considered the pursuer to be a trustworthy client with a financially excellent track record in relation to his property development dealings. It was clear from Mr MacDonald's evidence that the bank would have been loath to run the risk of losing the pursuer's business.

[27] In the circumstances I am satisfied that Albany Street was not acquired by the pursuer as a substitute for the premises but as a quite separate development project.

 

The nature of the development

[28] Prior to the submission of his offer for the premises, the pursuer had not made any firm plans for the proposed development of the premises. For the purposes of this litigation, the pursuer instructed Mr Ferrier to prepare outline plans for the development of the premises. Mr Ferrier explained that to produce these plans he had regard to the original drawings of the premises. He also looked at some of the outline proposals prepared by Plum Developments Limited. He collaborated with the pursuer as to how the premises would be converted into a flatted development. The plans prepared by Mr Ferrier show that the development would have consisted of seven flats. He explained that although there was input from the pursuer into the proposed scheme, it was a two way process. I am prepared to proceed on the basis that from a structural point of view the proposed development set out in the plans prepared by Mr Ferrier was feasible.

[29] The defenders argued that the seven flatted scheme was designed to maximise the pursuer's loss and did not reflect what would have happened in reality. For example, when the pursuer acquired a similar type of property, namely, Albany Street, he converted part of that property into his own home. Also, it was apparent that in the document submitted by the pursuer to the club, and from remarks made by the pursuer to Mr Macdonald and Miss Docherty, the pursuer did mention that if he did acquire the premises, part of them might be converted to form a town house for himself. It had been his ambition to own a town house in the Edinburgh New Town, an ambition he fulfilled once he purchased Albany Street.

[30] However, by the time the pursuer acquired Albany Street the pursuer's financial position had changed, having sold Central Lettings Limited. The pursuer was a successful businessman, and at the time when he might have purchased the premises, having regard to the potential cost involved in any development of the premises, I am satisfied that he would have sought to maximise the profitability of the development of the premises. That does not mean that the actual development as set out by Mr Ferrier would indeed have been the development carried out. It became clear in the course of Mrs Jamieson's evidence that there was a real risk that the pursuer would have obtained planning consent only for the construction of 6 and not 7 units. Indeed Mr Murphy, when dealing with quantum, sought to adjust the figures by accepting that only 6 units would in fact have been constructed. The exercise carried out by Mr Ferrier provides a broad basis as to the nature of the development the pursuer might have carried out had he acquired the premises and the potential costs involved, but taken in conjunction with the evidence on subsequent sales, it does involve a degree of speculation that renders it unsatisfactory as a sound basis for assessing the pursuer's potential loss of profit. This is a matter to which I shall return when dealing with quantum.

 

The development vehicle

[31] The pursuer's offer for the premises ran in his own name as an individual but contained a nominee clause that allowed the property to be acquired in another name. The pursuer explained that it was his practice to have such a clause inserted in order to keep open the possibility of investigating the most tax efficient method of carrying out any development opportunity. Normally, he would take advice on that particular issue from his accountant, Mr McLeod. In preparation for this litigation, the pursuer went through that exercise and obtained advice from Mr McLeod to the effect that he would be some £55,000 better off by carrying out the development personally rather than through a corporate vehicle.

[32] Mr McLeod in his evidence confirmed that he was asked to consider, on a hypothetical basis, the pursuer's position in relation to the pursuer's potential exposure to tax if he had been able to develop the premises. Mr McLeod confirmed that the pursuer had taken tax advice from him in the past in relation to the structuring of development opportunities. He had no reason to doubt that the pursuer would not follow the same course and seek tax advice had he successfully acquired the premises. Mr McLeod confirmed that the most tax efficient method for the proposed development would have been for the pursuer to have carried out the development in his own name as an individual and that the pursuer by doing so would be about £55,000 better off.

[33] In his submissions Mr Campbell argued that the pursuer had failed to prove that he would indeed have carried out the development as a sole trader. Mr Campbell pointed out that he had never done so before or since. Also, for the pursuer to carry out the development in his own name, he would have had to register for VAT or be left with a large irrecoverable VAT bill. Carrying out the proposed development in his own name without the protection of limited liability would expose him to unnecessary risks. The point behind this argument was that one of the corporate vehicles that the pursuer employed in the past, Devodale Limited, was not owned or controlled by the pursuer and the other investor would also benefit.

[34] I am satisfied that the pursuer would have sought advice from Mr McLeod and would have taken the advice that Mr McLeod would have given him had he obtained the premises. Carrying out the development in his own name would have resulted in a significant tax advantage which would be sufficiently tempting to someone like the pursuer. He would have had no real difficulty in registering for VAT. According to Mr McLeod such registration could be achieved in about 4 to 6 weeks. Furthermore, prior to his abortive offer, the pursuer himself had obtained financial backing from his bank for the purchase of the premises. He did not require financial assistance from any other source.

 


Mitigation of loss

[35] After the defenders' error came to light, the pursuer attempted to persuade the successful purchasers, Plum Developments Limited, to sell the premises to him. He instructed an alternative firm of solicitors, and by letter dated 26 July 2002, they wrote on his behalf to Mr Cliff of Plum Developments Limited inviting him to advise them of the price which he might be willing to consider selling the property on to the pursuer. Mr Cliff responded by letter date 16 August 2002 indicating that the pursuer would need to offer a profit in excess of £350,000 exclusive of the costs already incurred. Thereafter the pursuer's solicitors contacted the defenders to see whether they were prepared to pay a sum of about that size to resurrect the deal for the pursuer. The defenders refused to do so. It does not seem to me that the pursuer can be faulted for deciding not to pursue the possibility of a purchase from Plum Developments Limited since the additional sum that he would have had to pay would have had a significant impact upon the profitability of the project.

[36] As I have already mentioned, the pursuer's projected date of entry in terms of his offer for the premises was 1 October 2002. By that date he knew that there was no prospect of acquiring the premises. The pursuer gave evidence that thereafter and until the purchase of Albany Street, a development opportunity of the type in which he might have been interested did not come on to the market. There was no evidence to the contrary, and even if such an opportunity had arisen, there would be no guarantee that the pursuer would have been the successful bidder.

[37] The period from early 2003 until October 2003 formed the major portion of the pursuer's programme for the development of the premises. At one point in his examination in chief, the pursuer seemed to suggest that because of the possible entry date for Albany Street being in September 2003 that there would not be enough time to begin another development. In cross examination he explained that by that he meant he would not have been able to find, purchase and be successful in the bidding process to acquire a development unit comparable to the premises. I think that was a reasonable explanation. The pursuer did not strike me as someone who would pass up the opportunity to make money if it arose.

[38] Because of the defenders' failure the pursuer was put in a position in which he had to readjust his business intentions. His ultimately abortive attempt to resurrect the purchase of the premises was a reasonable one. Furthermore, I am satisfied that in the circumstances he took all reasonable steps to explore whether or not an appropriate development prospect was on the market and available to him for exploitation. He was not able to acquire a substitute development opportunity.

 

Loss of profit

[39] I have come to the conclusion that as a result of the defenders' failure the pursuer, as a matter of fact, has suffered a loss of profit. It is not now disputed that had his offer been timeous it would have been accepted by the club and he would have acquired the premises. He was not able to mitigate the defenders' failure by going into the market place and acquiring similar premises as a substitute for the loss of the premises caused by the defenders' failure. In my judgement, the steps that he took following upon the discovery of the defenders' error were reasonable. Whether or not the pursuer's claim for loss of profits is a claim for which the defenders can be held responsible, and if so, to what extent, are matters I shall look at subsequently.

 

The defenders' knowledge
[40
] The pursuer had used the defenders as his solicitors for a number of years. They had acted for him in relation to the Central Letting Limited business and indeed acted as the company's company secretary to that company. They had acted for him in connection with his business as a property developer. Miss Docherty knew that the pursuer's purpose in seeking to purchase the premises was for purposes of development and subsequent sale. Although she was not involved in the drafting of the document sent with the offer of 14 May 2002 she was aware of its contents.

[41] I am satisfied that the defenders, and Miss Docherty in particular, would have been aware that if the pursuer failed to purchase the premises he would lose out on the prospect of obtaining an asset that would generate profit for him.

 

Summary of the facts
[42
] At this stage I am able to arrive at the following conclusions on the factual issues:

(a) Had the pursuer's offer of £1,100,000 for the premises been timeous, he would have purchased the premises.

(b) The pursuer would have been able to generate profit from the development of the premises;

(c) Albany Street was not a substitute development for the premises;

(d) The pursuer was unable to acquire a substitute development project that would have mitigated any loss of profit he sustained;

(e) The defenders (Ms Docherty) knew that the pursuer intended to purchase the premises for development purposes in order to make a profit from the transaction; and

(f) The sum of £1,100,000 that the pursuer instructed to be offered to the club represented the market value of the premises.


Legal issues

Submissions for the pursuer

[43] Mr Murphy on behalf of the pursuer invited me to sustain the pursuer's first and second pleas-in-law to the extent of granting decree in the sum of £614,066. He also submitted that interest at the rate of eight per cent should not run from the date of citation but from 15 July 2003 until payment. The date of 15 July 2003 was the selected date because it represented the mid point of the receipt of income from the anticipated sales of the units contained in the pursuer's proposed development proposals.

[44] In dealing with the nature of the pursuer's claim, Mr Murphy submitted that it was for breach of contract and the breach of contract was the defenders' failure to deliver the pursuer's offer timeously. The action was not to be characterised as one of seeking damages for the loss of a chance.

[45] So far as the assessment of damages was concerned, Mr Murphy submitted that the purpose of damages was to put the victim in the position that he would have been in but for the breach of contract. He went on to refer to Hadley v Baxendale (1854) 9 ex. 341 and in particular the well known passage in the judgement of Alderson, B. Mr Murphy argued that recovery by the pursuer was possible under the first head of what was said out by Alderson B but that in any event he could not fail under the second head.

[46] Mr Murphy submitted that on a correct analysis the position in this case was that the pursuer has proved that his offer would have been accepted and that he would have proceeded to develop the premises and make profit. The fact that he proposed to develop the premises in order to make profit was a fact within the reasonable contemplation of the defenders. The context of this case was one where a commercial conveyancer was acting on behalf of a commercial entity and in such circumstances was taken to be aware of the fact that the whole purpose of the transaction was to produce profit for the pursuer.

[47] Mr Murphy referred to Haberstich v McCormick & Nicholson 1975 SC 1. He observed that the observations made in that case by the Lord President (Emslie) and Lord Cameron indicated that the quantum of damages in a case of this kind was not to be assessed under reference to a fixed and inflexible rule which focussed solely on the date of the breach but that the facts might require that it was necessary to look to the future to assess the actual loss. In developing this part of his submission Mr Murphy also referred to Diamond v Campbell-Jones [1961] 1 CH 22, Cottrill v Steyning & Littlehampton Building Society [1966] 1 WLR 753 and G & K Ladenbau (UK) Limited v Crawley & de Rey [1978] 1 WLR 266. He submitted that these cases supported the proposition that damages for loss of profits in a case such as this could be recovered by the application of the rules set out in Hadley v Baxendale. Mr Murphy also referred to Jenmain Builders Limited v Steed & Steed [2000] PNLR 616 essentially to distinguish it from this case. He pointed out that that case was not decided under reference to contract but under reference to the scope of the duty of care in tort. He submitted that the reasoning in the decision was not clear and appeared to be contrary to the approach in Haberstich and the other English cases to which he referred.

[48] Mr Murphy also made some submissions on whether or not the pursuer had acted reasonably once he came to realise what had happened. Again I have set out the circumstances in my findings as to what the pursuer sought to do and I did not understand the defenders to challenge that his actions were in the circumstances reasonable.

[49] In summary, Mr Murphy's position was that this was a simple breach of contract case and since the breach was admitted the essential outstanding issue was whether or not the loss that the pursuer sustained was a loss that ought to have been in the reasonable contemplation of the defenders, and Miss Docherty in particular, at the time the contract was made. That loss was a loss of profit.

 

Submissions for the defenders
[50
] Mr Campbell agreed that this case was not to be characterised as an action for the loss of a chance. The essence of Mr Campbell's position was that, even if the pursuer proved everything that he has set out to prove, he would not be entitled to recover the loss of profit which he says he would have earned after the development and sale of the premises.

[51] Mr Campbell made a number of preliminary general observations. Firstly the negligence relied upon by the pursuer related only to the sale and purchase of the property. Secondly, apart from wasted costs, and there was no claim for that particular type of loss, the immediate outcome of the defenders' breach was that the pursuer failed to obtain the premises but he also retained the purchase price which was equivalent to the market value of the premises. This case was unusual because the negligence relied upon resulted in a failure to obtain the asset in comparison to other cases where the innocent party might be locked into a loss causing situation. Thirdly, whilst it was accepted Miss Docherty knew that at least part of the pursuer's business was that of property development, nevertheless the most that could be said was that her negligence stopped the pursuer from developing this particular property. She had no reason to contemplate that her failure would prevent the pursuer from developing other properties, or from using the money for other business purposes within his overall enterprises. Fourthly, this was not a case where something unique or of special value for the prospective purchaser was being acquired. In such a case different considerations may very well apply.

[52] Mr Campbell went on to advance four separate propositions. Firstly, he submitted that where a solicitor's negligence caused a prospective purchaser to fail to obtain an asset, the general rule is that the loss sustained is measured by the value of the asset at the date when it would have been obtained less the price that would have been paid and the wasted costs. Accordingly, if the prospective price represented the market value of the property, the only possible head of loss would be for wasted costs. If, notwithstanding negligence, the asset is purchased but subject to an undisclosed problem, then the normal measure is the price paid less the market value at the time of purchase. This diminution in value rule is the general rule.

[53] The second proposition advanced by Mr Campbell was that this general rule applied even if some further loss was reasonably foreseeable such as for example the prospect of the purchaser later selling the subjects at a price which generated a profit.

[54] The third proposition advanced by Mr Campbell was that this general rule would not be applicable if there was some special feature about the circumstances of the case which justified a different approach to assessment of the appropriate compensation.

[55] Mr Campbell's fourth proposition was that in this case there was no special feature which would justify departure from the normal rule. He submitted that the overriding need to achieve a fair and reasonable compensatory award did not point to a different outcome.

[56] In developing these propositions Mr Campbell referred to McGrigor, Damages (17th edition) chapter 29, paragraphs 29-06 - 29-17. He submitted that the shape of that particular chapter was that there was, first of all, a statement of the general rule, and then a discussion on examples of exceptions to the general rule. The onus was on someone in the position of the pursuer to say why the general rule should not be followed. He submitted that the reasonable contemplation approach was not the touchstone and this was not Hadley v Baxendale territory but rather what was fair and reasonable compensation.

[57] In dealing with the case of Haberstich v McCormick & Nicholson Mr Campbell accepted that what he had been referring as the general rule was not followed in that case but he submitted that the real issue in that case was whether there was a fixed rule or a general rule. He said he was not arguing in favour of a fixed rule but rather that there was a general rule and that good reasons had to be advanced to justify a departure from that general rule.

[58] Mr Campbell placed particular reliance on the observations made in Ford v White [1964] 1 WLR 885 and [1964] 2 AER 755. He submitted that that case was a classic example of the application of the general rule and of the fundamental principles involved. He relied in particular on the observations made by Pennycuick J at page 757G-758B. He argued that to award the pursuer the loss he claimed in this case would not be putting him into the same position as he would have been in if his rights had been observed, but into a much better position because he would receive the profit that he claims he would have made without actually having to earn it. Mr Campbell also relied upon Aylwen v Taylor Joynson Garrett [2002] PNLR 1 and Oates v Anthony Pitman & Co [1998] PNLR 683 in support of his approach to the whole issue of loss of profit.

[59] A major plank of Mr Campbell's submissions was his reliance on the decision in South Australia Asset Management Corporation v York Montague Limited (1997) AC 191 ("SAAMCO") and in particular what was said by Lord Hoffman at pages 210-218. That case highlighted, Mr Campbell submitted, the importance of analysing the scope of the duty that rests upon the wrongdoer. Relying upon what was said by Lord Hoffman, Mr Campbell submitted that the pursuer must show the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. In this case, the agreement entered into between the pursuer and the defenders was that the defenders would act on behalf of the pursuer in the purchase of the premises and that meant that there was imposed upon them a duty of reasonable care aimed at ensuring all necessary steps were taken with a view to the pursuer being able to offer for the premises. The scope or extent of the consequences for which breach might render them liable was to be construed in the context of that setting. He submitted that Mr Murphy's approach of injecting reasonable contemplation into the equation was a flawed approach and contrary to what was said in SAAMCO. It was not now sufficient to ask traditional questions such as what might have been in the reasonable contemplation of the parties, but to decide for what type of loss a claimant might be entitled to compensation. That question was not to be addressed by the reasonable contemplation approach but by analysing the scope of the duty and to ask whether the defenders' responsibility extended to the losses claimed.

[60] In addressing the scope of the duty on the defenders in this case Mr Campbell posed the question whether or not Miss Docherty in acting on behalf of the pursuer accepted responsibility for the development itself or whether or not that was a separate issue which only became relevant once the pursuer obtained the premises. Mr Campbell went on to submit that her negligence only related to the failed transaction and did not relate to what was done or might have been done thereafter. Furthermore the pursuer retained the sum that represented the market value for the premises and was not prevented from pursuing his business activities in the normal way thereafter.

[61] In dealing with this limb of his argument, Mr Campbell also referred to Nykredit Mortgage Bank plc v Edward Erdman Group Limited [1997] 1 WLR 1627 and in particular what was said by Lord Nichols of Birkenhead at 1630F, 1631E-1632A and Lord Hoffman at page 163A-1638F-H. These passages essentially reiterated the SAAMCO proposition that a valuer, as was the position in SAAMCO, may not be liable for all the consequences which flow from his negligence even if they are foreseeable.

[62] Mr Campbell also relied on Jenmain Builders Limited v Steed & Steed and submitted that the decision in that case supported his position. The plaintiff in Jenmain Builders Limited failed to recover the development value of the property and that was because any subsequent added value resulting from development would have been a wholly separate matter attributable to work and expenditure for which the negligent solicitor had taken no responsibility and was outwith the scope of the duty.

[63] In summarising his position Mr Campbell submitted that the scope of the duty on Miss Docherty related only to the immediate consequences relating to the sale and purchase to the transaction and there was no good reason to conclude that undertaking the duty of care to administer the missives and conveyancing that she accepted any responsibility for consequential losses flowing from the pursuer's inability to develop the property.

[64] In responding to Mr Murphy's reliance upon the decisions in Diamond v Campbell-Jones and Cottrill v Steyning & Littlehampton Building Society Mr Campbell argued that neither of these cases was a duty of care case and, in any event, the decisions pre-dated the manner in which the importance of focussing upon the scope of the duty had been developed in cases such as SAAMCO. Similarly in relation to the case of G&K Ladenbau (UK) Limited v Crawley & de Rey Mr Campbell submitted that in light of the law as it now was, the decision in that case, relying as it did on principles derived from Hadley v Baxendale, was unsatisfactory and should not be followed.

[65] So far as disposal was concerned Mr Campbell submitted that if the defenders' first plea-in-law were to be sustained then the appropriate remedy would be absolvitor since the case had gone to proof and there was to be a decree in foro. In support of that approach he referred to Board of Management v Bells Trustees 1952 SC (HL) 78 and in particular what was said by Lord Normand at page 88. He also invited me to sustain a second, third and fourth pleas-in-law.

 

The pursuer's reply
[66] In response to the defenders' submissions Mr Murphy submitted that the approach taken by Mr Campbell was misconceived. He said again that the correct approach was that set out in Haberstich v McCormick & Nicholson and that each case depended upon its own facts and circumstances. He submitted that there was no general diminution in value rule to be applied in cases such as this and indeed that was the trap that both counsel in Haberstich v McCormick & Nicholson fell into. If there was such a general rule, and if the defenders were correct in their analysis, then the effect of that would be that recovery of consequential losses in claims against solicitors would be excluded. Mr Murphy submitted that such a consequence was not borne out by the textbooks or by authority. He disagreed with Mr Campbell's analysis of Chapter 29 of McGregor and he submitted that the structure of that chapter did not justify the conclusion that there was a general rule.

[67] Mr Murphy relied on Clark and Lindsell Torts at paragraph 7-151 to 7-152 in submitting that in this case there was no suggestion that unusually high profits were being claimed. Properly analysed, this was a black and white negligence case similar to the failure to deliver a machine where to the knowledge of the seller the purchaser intended to use the machine for profit. In such a case it could not be said that the purchaser would not be entitled to recover the normal loss of profits that he might have suffered by way of loss. He referred to Havenledge Limited v Graeme John & Partners [2000] PNLR 804 which he submitted was similar to a development type of case. He argued that the loss of profit for which there was recovery in that case was far more remote than here. He also made reference to Reeves v Thrings & Long [1996] PNLR 265 and to the observations made in that case by Lord Bingham at page 278. His general proposition was that the cases and the textbooks did not support the notion of a general rule as developed by Mr Campbell in his submissions.

[68] Under reference to the SAAMCO decision Mr Murphy submitted that the duty resting upon the defenders and arising under the contract had to be considered in its commercial setting. It was necessary to examine the facts and circumstances. That was the approach taken in Haberstich and that approach in this case would allow recovery for loss of profits. He also submitted that the cases relied upon by the defenders and in particular Ford v White, were quite different on their facts and broadly speaking were cases involving the giving of advice or providing information as a consequence of which a claimant was left locked into a poorer bargain. In this case, the pursuer's intentions were to secure a business asset with development potential and that was frustrated by the defenders' breach of contract. Because of that breach of contract the pursuer was left with a black hole in his business.

[69] Mr Murphy also submitted that when considering the issue of duty of care the cases involving the giving of advice and providing information required to be distinguished. Although this case involved a solicitor and could be described as a case of professional negligence it could properly be equiparated to the sort of case where a seller failed to deliver a machine to a prospective purchaser because of some basic mistake on the seller's part. Mr Murphy posed the question that if the seller would not be protected against a claim for loss of profit then why should a solicitor have such protection.

[70] In the final section of his submissions Mr Murphy made a number of observations in relation to some of the cases referred to by the defenders. He argued that Jenmain Builders Limited v Steed & Steed depended on its facts and in any event was a case on tort. He submitted that it did not support the proposition that the diminution of value rule had to apply in claims against solicitors, but if it was purporting to set out such a principle, then, he submitted it was wrongly decided. The case of Ford v White was a case that did not raise the kind of loss of profit issue raised in this case.

[71] Mr Murphy agreed that if the case was decided on a point of relevancy in the defenders' favour then dismissal would be the appropriate remedy. On the other hand, if the case was decided in the defenders' favour on the basis of the scope of the duty of care argument then he could see that absolvitor may be the appropriate disposal.

 


Discussion

Background

[72] This is a breach of contract case and it is trite to say that the purpose of damages in such a case is to put the pursuer into as good a position as he would have been in if the contract had been performed. As it was put in Robinson v Harman (1848) 1 Ex Ch 85 by Parke B at page 855:

"The rule of common law is that where a party sustains a loss by reason of a breach of contract he is, so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed."

[73] However it is also well settled that the law employs a number of devices to limit the financial stream of consequences that might follow upon a breach of contract. One such restriction is the remoteness test as set out in Hadley v Baxendale by Alderson B at page 335:

"Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may be fairly and reasonably considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the formal breach of it".

Subsequent cases such as Victoria Laundry (Windsor) Limited v Newman Industries Limited [1949] 2 KB 528 and C Czarnikow Limited v Koufos, (1969) 1 AC 350 have endorsed this approach to the assessment of damages in breach of contract cases. Whether the Hadley v Baxendale approach is to be regarded as two rules or the statement of a general principle as suggested by Lord Reid in C Czarnikow Limited v Koufos is of no particular significance to this case. Lord Reid in that case pointed out at page 385:

"The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation".

I have set out at paragraphs [40] - [41] Miss Docherty's state of knowledge as at the time of the contract. Mr Campbell did not dispute that Miss Docherty would have had in her contemplation, standing her knowledge of the pursuer's business, that if the pursuer failed to acquire the premises prima facie he would lose their development potential. I am of the view that a claim for loss of profit in the circumstances of this case satisfies the remoteness test as explained by Lord Reid in C Czarnikow Limited v Koufos.

 

Diminution in value approach

[74] The defenders in their submissions relied upon a number of cases in support of the proposition that the appropriate measure of damages in a case of this kind was the diminution in value approach. That approach can be seen in operation from the decision in Ford v White. In that case the plaintiffs purchased land which was offered for sale at a price that reflected the fact that it was subject to a restriction against building. The plaintiffs purchased the land in reliance on the defendant solicitors' advice that it was free from restrictions against building. Once they became aware of the existence of the restriction, the plaintiffs sued their solicitors and contended that they were entitled to claim in damages the difference between the market value of the land subject to the restriction and the market value of the land free from the restriction. That difference was £1250. Pennycuick J held that the measure of damages was the difference between the price paid and the market value of the land subject to the restriction at the time of purchase. Since in fact the price paid by the plaintiffs was equivalent to the market value of the property subject to the restriction as it was at the time of purchase, they had in fact suffered no loss. This result was a logical one, otherwise the plaintiffs would have been put into a better position than they would have been in if the solicitors had not failed in their duty to discover the restriction. The case does show that the general approach in the circumstances that prevailed in that case is to ascertain the difference in value between the market value of what a purchaser thought he was buying and what the market value actually was once a defect of some kind has subsequently been discovered.

[75] A case that provides some helpful guidance on the diminution in value approach is Oates v Anthony Pitman & Company [1998] PNLR 683. In that case the plaintiffs proposed to use property purchased by them both as a home and for the purposes of the business of holiday lettings. Their solicitor failed to discover that there was no planning permission in place for such a purpose. The plaintiffs refurbished the property and indeed used the property for a period of time before discovering that there was no planning permission for such a business. Retrospective planning permission was obtained but only to a limited extent. The plaintiffs sued the solicitors' firm for negligence in failing to discover that there was no grant of planning permission. Liability was not contested. The plaintiffs claimed damages for the diminution in value of the property, the cost of obtaining planning permission and the loss of profit due to being restricted to carrying out the business of holiday letting for a limited period. There was no dispute that the plaintiffs were entitled to recover the cost involved in obtaining planning permission and also that the correct measure of damages was the diminution in value of the property. It was agreed that the plaintiffs were entitled to recover the difference between the market value of the property at the time of purchase on the basis that it had planning permission for holiday flat use and the market value of the property at the time of purchase without planning permission. The issue on that particular head of claim related to the actual value of the property at the time of purchase. At first instance the trial judge made certain findings in relation to what he considered the diminution in value to be and rejected the plaintiff's claim for loss of profits. In the Court of Appeal, in giving the leading judgment, Sir Brian Neill made the following observations at page 691:

"We are concerned in the present case with a claim for damages for breach of a duty of care. It is not a claim for damages for a breach of warranty. Thus it is not suggested that the defendant firm gave a warranty that the property had planning permission for use as holiday flats.

I shall start by considering the plaintiff's claim for damages excluding the claim in respect of loss of profits.

The liability of solicitors in circumstances which are broadly similar to those in the present case has been considered in a number of authorities. As Pennycuick J. explained in Ford v White & Co [1964] 1 WLR 885 at 888:

'In the simple case of the purchase of property at a price in excess of its market value as a result of wrong advice, the measure of damage must be the difference between

(1) the market value of property at the date of purchase, and

(2) the price actually paid.'

This has been described as "the diminution in value rule". But the rule cannot be applied indiscriminately and it is necessary to examine the facts of the individual case."

Sir Brian Neill then goes on to examine what was said by Bingham LJ in County Personnel (Employment Agency) Limited v Alan R. Pulver & Co [1987] 1 WLR 916. In that particular case Bingham LJ said on page 925:

"(2) On the authorities as they stand, the diminution in value rule appears almost always, if not always, to be appropriate where property is acquired following negligent advice by surveyors. [A number of cases] ... illustrate its application in cases involving both surveyors and solicitors.

(3) That is not, however, an invariable approach, at least in claims against solicitors and should not be mechanistically applied in circumstances where it may appear inappropriate. In Simple Simon Catering Limited v Binstock Miller & Co (1973) 228 EG 527 the Court of Appeal favoured a more general assessment, taking account of the 'general expectation of loss'. In other cases the cost of repair or reinstatement may provide the appropriate measure: Dodd Properties (Kent) Limited v Canterbury City Council [1980] 1 WLR 433, 456 per Donaldson LJ. In other cases the measure of damages may properly include the cost of making good the error of a negligent advisor: examples are found in Braid v W.I. Highway & Sons (1964) 191 EG 433 and GK Ladenbau (UK) Limited v Crawley & de Reya [1978] 1 WLR 266.

(4) While the general rule undoubtedly is that damages for tort or breach of contract are assessed at the date of the breach this rule also should not be mechanicalistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule..."

[76] An example of a case where the diminution in value approach was adopted but at a different date from the date of the breach is Dent v Davis Blank Furniss. That was a case where the property purchased by the plaintiffs was registered as common land, and the defendant solicitors had failed to carry out a search of the register. The purchase was completed in 1991 and by the time in December 1994 when it came to the notice of the plaintiffs that most of the land purchased was registered as common land, they had built a substantial new house on the property at substantial cost. The plaintiffs' expenditure was unmatched by any commensurate increase in value. Having reviewed the authorities Blackburne J went on to say at page 542:

"These extracts demonstrate the variable approach to the measure of damages (as regards both method and time of assessment) in claims against solicitors arising out of circumstances similar in nature to those that arise here. Beyond having regard to the overriding compensatory principle, it is impossible to lay down hard and fast rules to be followed. The matter is, as the present Lord Chief Justice wisely observed in Reeves v Thrings & Long 'an area in which legal rules may have to bend to the particular facts of the case'."

He then went on to conclude that the proper approach to the assessment of the plaintiffs' loss was to apply the diminution in value approach by ascertaining firstly, the difference between the open market value of the property in its state assuming that it was free from any common land registration and, secondly, the lesser of what the plaintiffs spent on it and its open market value as so improved. He concluded that assessment of the plaintiffs' loss should not be confined by applying the diminution in value rule merely at the time of the acquisition of the property because that would be to under compensate the plaintiffs for their loss. In ignorance of the common land registration the plaintiffs had transformed the property by incurring expenditure on it and although the precise extent of that expenditure might not have been foreseen by the defendant, that did not matter because it was reasonably foreseeable that there would be such expenditure and that that expenditure might not be matched by any corresponding increase in value. The plaintiffs in fact had managed to achieve sufficient deregistration for their purposes and it was to that date in 1996 that Blackburne J had regard to when quantifying the plaintiffs' loss. What I consider important from his approach is that whereas generally the diminution in value approach as at the date of the breach can operate justly in most cases where the innocent purchaser is locked into a bargain which is in some way defective, it is subject to the overriding principle that the innocent party is entitled to fair compensation.

[77] The pursuer placed particular reliance on the decision in Ladenbau (UK) v Crawley & de Reya. In that case, in August 1972, the plaintiffs instructed solicitors to act for them in the purchase of a plot of vacant land which they intended to develop and for which they had applied for planning permission. The solicitors failed to establish whether there were any rights of common over the land. The sale was completed in May 1973 and at about that time the plaintiffs also negotiated a resale to another purchasing company with the completion date for this sub-sale projected to be in September 1973. The solicitor acting on behalf of the sub-purchaser established that rights of common, albeit erroneously, had been registered against part of the land. An application then had to be made to effect the necessary amendment to the register but that did not happen until April 1974. That meant that the completion date in respect of the sub-sale was delayed and did not in fact take place until May 1974. Although the plaintiffs were able to complete the sub-sale and make the anticipated profit, receipt of that profit was delayed by about 9 months. One of the items for which they claimed in the action was the interest they would have made on the profit during that period. In allowing recovery for that part of the claim Mocatta J, having made reference to Hadley v Baxendale and to the solicitors' knowledge as to the plaintiffs' intentions in relation to the site, said at page 289:

"In the light of these instructions and in the state of the property market as it was then, the defendants should in my judgement have reasonably contemplated that if they failed to secure an unencumbered title for the plaintiffs without warning them of the defect, the damages that the plaintiffs would suffer were 'not unlikely' to be the loss of the handsome profit on resale. I choose Lord Reid's phrase in C. Czarnikow Limited v Koufos [1969] 1 AC 350, but the phrases favoured by the other Law Lords in that case are equally applicable."

Mr Campbell was critical of Mocatta J's approach as being old fashioned and simplistic. However, it seems to me that, unlike the position in Ford v White, the simple application of the diminution in value approach would not have put the plaintiffs into the position they would have been in had the contract been performed and completion had taken place at the original date. Mocatta J's approach was designed to provide the plaintiffs with fair compensation.

[78] Another case where a loss of profit claim was held relevant in connection with the purchase of heritable property is Havenledge Limited v Graeme John & Partners. In that case the plaintiff company purchased a derelict property with the intention of renovating it and then operating it as a nursing home. The defendants were the solicitors who acted for it in connection with the purchase. The sale was completed in the course of 1987. After about 9 months of renovation work the nursing home was opened in 1988. After it opened cracking developed and it was discovered that this was due to mining under the property. Continuing repair works were implemented by the plaintiff with an adverse effect on the business. Eventually the plaintiff went into receivership in May 1966. The claim against the defendants was that they had failed to carry out any coal mining search, or to advise the plaintiff to do so, before proceeding with the purchase. Richards J was required to determine the preliminary issue as to whether the claim was statute barred but he was also addressed on the issue of damages. He held that the claim was not statute barred. The plaintiff claimed for wasted expenditure in the renovation of the property and also for lost profit. In dealing with these claims Richards J said at page 816-817:-

"In the light of those authorities it seems to me that the court's task is to assess what approach will best achieve the result of compensating, but not over compensating, the claimant for loss resulting from the negligence. The claimant here, on its pleaded case, suffered a loss that would not have been suffered but for the defendants' negligence. A sum of over £500,000 was spent on refurbishment which would not have been spent had the claimant been properly advised; and in the event much of that expenditure was wasted, in that, by reason of the cracking, it was not possible to generate the profit to which the expenditure would otherwise have led. If the claimant had sold the property on discovering the negligence (which was in fact after the cracking was discovered), I see no reason why a proper measure [of] damages should not have been the amount of the expenditure less the value of the property as refurbished and any net profits earned prior to sale. The fact that the claimant did not sell the property but soldiered on in an attempt to earn further profits may give rise to arguments as to mitigation etc., but does not render it inappropriate in principle to adopt a measure of damages based on expenditure incurred less net profit earned and the final value of the property as refurbished. Such a measure is capable of securing fair compensation for the loss incurred by reason of the negligence.

 

The loss of profits claim is more problematic but it does not strike me as an illegitimate attempt to circumvent the normal rule that lost profits are not recoverable. If the claimant would have purchased and refurbished another property as a nursing home and had been properly advised about Haven Lodge, then the difference between the claimant's financial position had that course been adopted and the claimant's financial position after proceeding with Haven Lodge - a centre element of which is the difference in net profits - does appear to me to [be] capable of representing a proper measure of the claimant's loss as a result of the negligence. This basis of claim is thinly pleaded and not dealt with adequately by the evidence before the Court on the preliminary issue. It may also give rise to problems of foreseeability and remoteness. But I do not think that I should reject it out of hand as a possible measure of damages".

[79] It can be seen from these observations that the lost profits for which damages were being sought were not those of the nursing home that eventually failed but of the notional nursing home that the plaintiff would have operated had the solicitors not been negligent. It is clear from Richards J's approach that because the diminution in value approach contended for by the defendants might lead to an obviously unjust result so far as proper compensation was concerned, a claim for loss of profit was a relevant claim.

[80] Mr Murphy in his initial submissions placed particular reliance on the decisions in Diamond v Campbell Jones and Cottrill v Steyning & Littlehampton Building Society. The dispute in Diamond v Campbell Jones was between the repudiating vendor of the leasehold of a London house and the purchaser. The purchaser was a dealer in real estate and in the past had bought and converted properties for sale at a profit. The purchaser failed to recover as damages the profit he would have made after conversion because the vendor did not know at the time of the contract the purpose for which the property had been purchased. Buckley J said that "special circumstances" were necessary to justify that kind of recovery, the clear implication being that had the vendor known of the purchaser's intentions, recovery for lost profit would have been permissible. That indeed is what happened in Cottrill v Steyning & Littlehampton Building Society. In that case the defendants, having granted the plaintiff an option to purchase land, in breach of that agreement sold the land to a third party in the knowledge that the plaintiff intended to develop the land. In those circumstances the plaintiff was successful in recovering damages by reference to the profits that the vendors contemplated he would have earned.

[81] It can be seen that these two cases involved breaches of contract by vendors of property and not as in this case solicitors acting on behalf of a party who wishes to enter into a contract for the purchase or heritage. Mr Campbell in his submissions submitted that these cases were unhelpful because they were not duty of care cases and predated the decision in SAAMCO. I shall later discuss the decision in SAAMCO. It is sufficient for present purposes to say that that decision underlines the importance of focusing on the scope of the duty incumbent upon a wrongdoer as a means of limiting his potential exposure to losses sustained by the innocent party. Although there may have been no specific discussion on the scope of the contractual obligations undertaken by the parties in breach in Diamond v Campbell Jones and Cottrill v Steyning & Littlehampton Building Society it cannot in my view be disputed that if in Cottrill the vendor had knowledge of the purpose for which the property was to be purchased the duty incumbent upon him would have included within its scope the consequential loss of profit sustained by the plaintiff. The same can be said for the decision in Diamond v Campbell Jones.

[82] It seems to me that from the passages to which I have just made reference and the other English cases relied upon by the parties in this connection that generally where as a result of the negligence of a solicitor a purchaser is locked into a bargain in relation to heritable property, and an undisclosed problem is subsequently discovered that affects the value of property, in the ordinary case the diminution in value rule will represent the normal measure of damages. That approach involves ascertaining as at the date of the breach the difference between the open market value of the property as it actually is and the open market value of the property in its presumed state. It is a method of fulfilling the fundamental principle that where there is a breach of contract the innocent party is entitled to be placed in the same position as if the contract had been performed. If a purchaser acquires a property that in fact is worth less than what he paid for it through the fault of his solicitors, the diminution in value approach puts the purchaser into the position he would have been in had the solicitors had not been in breach of duty.

[83] However the particular facts may demand another approach. Indeed it is recognised by Sir Brian Neill in Oates v Anthony Pitman & Company that the application of the diminution in value approach may be more difficult to apply where to the knowledge of the solicitor the property has been purchased for a particular purpose (page 695A). Furthermore it is clear from the observations made by Bingham LJ in County Personnel (Employment Agency) Ltd v Alan R Pulver and Co that the approach taken must reflect "the overriding compensatory rule".

[84] The only Scottish case put before me in this general area of the law was Haberstich v McCormick & Nicholson. In that case, solicitors acting on behalf of the pursuers in the purchase of a cottage failed to discover when the disposition was delivered that it was defective. It bore to be granted by persons who did not have title to the subjects. The solicitors were aware of the defect but did not advise the purchasers of it. The purchasers carried out certain improvements to the cottage and some three years later sold it at a price which was £1,500 lower than would have been offered had the title not been defective. At first instance the Sheriff held that damages should be assessed on the difference between the price at which the cottage could have been resold namely £5,000 and the price actually received by the pursuers £3,500. The sum of £5,000 was assessed by the Sheriff to be a fair estimate of the market value of the cottage with a good marketable title at the time of the resale. On that approach he awarded damages in the sum of £1500. The defenders on appeal argued that where a client had been the victim of a breach of contract by solicitors in connection with the purchase of heritable property and obtained less than what he had bargained for, "damages always fell to be assessed as at the date of settlement of the transaction and always fell to be measured by the difference between the price paid and the market value of the subjects as affected by the solicitors' breach of contract". A number of English cases, including Ford v White, were relied upon in support of that argument. The Lord President (Emslie) having referred to what was said by Pennycuick J in Ford v White dealt with the defenders' argument in the following way at page 8:

"It must be said, however, that these observations were made in the context of the circumstances of that case which were wholly different to those of this appeal. None of these cases, accordingly, appears to me to support the existence of the universal rule of general application for which the appellants contend."

The Lord President then went on to say at pages 9-10:

"With the very greatest of respect to the carefully researched and well presented arguments which I have so far summarised, I am not persuaded that we are required in this case to accept the existence of any general rule for the computation of damages which will apply to all cases or even the existence of a separate rule for each of two categories for cases, involving the negligence of solicitors in connection with the purchase of heritage. We are not required by authority to do so and further I am not satisfied by the arguments either of the appellants or respondents that it would be sound to affirm that any such rule or rules form part of the loss.

 

In my opinion each case must be considered on its own facts and circumstances, and in each the question of damages which remains a question of fact, must be resolved upon the proper application of the well known general principles which both parties to this appeal accepted as the starting points of their separate arguments."

[85] The Lord President went on to consider the case under reference to what was said in Hadley v Baxendale, and at page 10 said:

"In this case, as I see it, the simple facts are these. The pursuers, by reason of the defenders' breach of contract, acquired a cottage with a defective title when they should have acquired a cottage with a good one. When they came to sell that cottage they secured, because of the state of the title, a smaller price than they could otherwise have expected to obtain. In selling the cottage with a defective title, the pursuers have therefore suffered loss. The first question accordingly is whether that loss is a consequence which arose naturally from the defenders' breach of contract or was one which might reasonably be supposed to have been in the contemplation of the parties at the time they made their contract as a probable result of such breach of contract on the part of the defenders. The answer to that question in my opinion must be in the affirmative."

[86] In agreeing with the Lord President, Lord Cameron having also considered the English cases including Ford v White said at page 12:

"I would in no way seek to suggest that these cases were wrongly decided, but they do not in my opinion provide a complete guide to a decision of this case. Nor would I deduce from the opinion of the learned and eminent judges who decided these cases that they were professing to lay down a rigid rule for calculation of damages applicable to all such cases of breach of contract by solicitors and in all circumstances, particularly in the event of actual resale of the subjects with the defect and title still uncured. In none of the three cases founded upon, was there in fact a subsequent sale - as in this case - from which it could be demonstrated - with greater or less accuracy - what loss of prospective price the purchaser had suffered when the house came to be sold by him. The appellant's submission that the method of assessing damages in the English cases cited provided once and for all the only measure of loss accruing as a consequence of the solicitor's breach of contract appears to me not only to ignore the realities of the situation as it actually occurred, but to be based on a fallacious reliance upon the necessity of concurrence of injuria and damnum. No doubt the injuria is inflicted when the transaction is complete, no doubt damnum is incurred at the same time, but it does not seem to me necessarily to follow that the only damnum which at that moment can be qualified is and must be the final measurement of loss sustained."

In my view the approach taken by the First Division in that case is echoed by Bingham LJ in the passages to which I have already referred. What is clear from what is said is that the facts of a particular case have to be carefully analysed in order to determine the proper approach to the assessment of damages.

[87] Later I shall consider whether or not the loss of profit claim made by the pursuer falls outwith the scope of the duty that rested upon the defenders. So far as the diminution in value approach per se is concerned I do not consider this case to be appropriate for that approach. I consider that it is clear from the authorities to which I have made mention and the other authorities to which counsel drew my attention that the diminution in value approach is the normal approach to the measure of damages when heritable property is acquired and where solicitors have been negligent but it is an approach that is not of universal application. It is also clear from what was said in Haberstich v McCormick & Nicholson and other cases that the particular facts of the case might mean that an injustice might be caused to the claimant if the diminution in value approach is followed in a mechanistic way. This is not a case where a purchaser of heritage has been locked into a bargain and a comparison can be made between that bad bargain and what the bargain ought to have been, but rather a case where, due to the defenders' failure, the pursuer failed to acquire property with a view to making profit. The defenders were aware of the pursuers' general intentions for the premises and aware that he would lose the development potential of the premises if he failed to purchase them. In such circumstances the diminution in value approach is wholly inappropriate. Prima facie it fails to comply with the general principle underlying the aim of compensatory damages that the claimant who seeks damages for a breach of contract is "so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed". Where the whole purpose of the pursuer's intended purchase of the premises was to generate profit it seems to me that that aim would be frustrated if the diminution in value approach is followed.

 

Scope of the duty

[88] Allied to their contention that the diminution in value approach was the correct one in the circumstances of this case, the defenders also argued that, although loss of profit was foreseeable, the pursuer could not recover because such loss fell outwith the scope of the duty undertaken by the defenders. This argument was premised upon a detailed analysis of the decision in the SAAMCO case.

[89] The SAAMCO case concerned three appeals by valuers who had been required by lenders to value properties on the security of which they were considering advancing money by way of mortgage. In each case the valuers considerably overvalued the properties. The lenders provided loans on the properties which they would not have done if they had known the true values of the properties. The borrowers defaulted and the losses sustained by the lenders were substantially increased by a collapse in the property market. The lenders sued the valuers for recovery of all the losses that had been incurred. To take an example of one of the cases, the valuers had valued a property at £2.5 million and the lenders had advanced £1.75 million to the borrower. At first instance the judge found that the correct value of the property had been between £1.8 million and £1.85 million. Following upon the borrower's default, the property had been sold for £950,000. The trial judge awarded damages to the lenders on the basis that they were entitled to recover all losses, including that attributable to the fall in the market. The Court of Appeal upheld that decision and it was against that decision that the valuers appealed to the House of Lords. Another of the three cases had also been considered by the Court of Appeal with the same result. In the third case leave was given by the trial judge for an appeal direct to the House of Lords.

[90] In the House of Lords the only reasoned speech was delivered by Lord Hoffman. He began by indicating that the three appeals before the House raised a common question of principle namely "what is the extent of the liability of a valuer who has provided a lender with a negligent overvaluation of the property offered as security for the loan?" In considering the approach taken by the Court of Appeal he said at page 210:

"Much of the discussion, both in the judgement of the Court of Appeal and in argument at the Bar, has assumed that the case is about the correct measure of damages for the loss which the lender has suffered. The Court of Appeal began its judgement, at pp. 401-402, with the citation of three well-known cases (Robinson v Harman (1848) 1 Exe ch 850, 855; Livingstone v Rawyards Coal Company (1880) 5 App. Cas. 25, 39; British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Limited [1912] AC 673, 688-689) stating the principle that where an injury is to be compensated by damages, the damages should be as nearly as possible the sum which would put the plaintiff in the position in which he would have been if he had not been injured. It described this principle, at p403, as 'the necessary point of departure'.

 

I think that this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled to compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages. For this purpose it is better to begin at the beginning and consider the lenders cause of action."

Lord Hoffman then went on to say that what the valuers contracted to provide was certain information. The valuers had been required to provide an estimate of the price which the property might reasonably be expected to fetch if sold in the open market at the date of the valuation. There would be matters such as how much the borrower would need to borrow that the valuers would not be privy to. Lord Hoffman continued in the following way at pages 211-212:

"Because the valuer will appreciate that his valuation, though not the only consideration which would influence the lender, is likely to be a very important one, the law implies into the contract a term that the valuer will exercise reasonable care and skill. The relationship between the parties also gives rise to a concurrent duty in tort: see Henderson v Merrett Syndicates Limited [1995] 2 AC 145. But the scope of the duty in tort is the same as in contract.

 

A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law whether in contract or tort or under statute must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss at which he has suffered. Both of these requirements are illustrated by Caparo Industries plc v Dickman [1990] 2 AC 605. The auditors' failure to use reasonable care in auditing the company's statutory accounts was a breach of their duty of care. But they were not liable to an outside takeover bidder because the duty was not owed to him. Nor were they liable to shareholders who had bought more shares in reliance on the accounts because, although they were owed a duty of care, it was in their capacity as members of the company and not in the capacity (which they shared with everyone else) of potential buyers of shares. Accordingly the duty which they were owed was not in respect of loss which they might suffer by buying its shares. As Lord Bridge of Harwich said, at p.627:

'It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.'

In the present case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed."

[91] Lord Hoffman proceeds to consider how the scope of the duty is to be determined. In dealing with the case of an implied contractual duty he says that the extent of the liability is defined by the term which the law implies. He goes on as follows at page 212:-

"As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compelled the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking."

Having rejected the approach of the Court of Appeal Lord Hoffmann at page 214 sets out the principle that lies at the heart of the decision:-

"I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon the course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct, is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of the contract or as a tortious duty arising from the relationship between them.

 

The principle thus stated distinguishes between a duty to provide information for the purposes of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the advisor must take reasonable care to consider all the potential consequences of that course of action. If he is negligent he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct, and if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong."

[92] According to Lord Hoffman, the mistake made by the Court of Appeal was that they made the valuers liable for losses which would have been incurred even if they had given the correct valuations.

[93] SAAMCO highlights that even if a particular claimant can establish that a particular result would not have occurred but for the actions of one party and that the result was reasonably foreseeable it does not necessarily follow that any loss sustained is recoverable. The precise scope of the duty undertaken by the alleged wrongdoer may bring the inquiry to an end with the result that the loss sustained is purely coincidental. In SAAMCO itself, Lord Hoffman gave the following example at page 213:

"A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee."

In that situation, according to Lord Hoffman, the doctor would not be liable for his bad advice because the injury would have occurred even if the advice had been correct. Even although the mountaineer would not have gone on the climb if the correct advice had been given, the doctor was not liable because the duty of care imposed upon him was limited to protecting the mountaineer against injuries caused by his unfit knee. It may be that Lord Hoffman's chosen example could also be analysed in terms of causation, but it does at least serve as an illustration of the importance of focussing on the nature of the duty on the alleged wrongdoer as a limiting factor even if the "but for" test for causation is satisfied and even if the loss is reasonably foreseeable.

[94] What was said by Lord Hoffmann in SAAMCO was considered by the House of Lords in Aneco Reinsurance Underwriting Ltd v Johnson and Higgins Ltd [2002] Lloyds Rep 157. That was a somewhat complex case. In short, there was no dispute that the plaintiffs who were insurers were entitled to recover from the defendant insurance brokers losses of almost $11 million dollars. The dispute centred upon an additional loss of $24 million dollars. The plaintiffs succeeded in the Court of Appeal in recovering the full amount of their losses. The defendant brokers' appeal to the House of Lords was dismissed.

[95] In considering Lord Hoffman's speech in SAAMCO Lord Lloyd of Berwick says at page 181:

"What indeed is the SAAMCO principle? It is surely the principle which has been common ground throughout the argument before us that a defendant is not liable in damages in respect of losses of a kind which fall outside the scope of his duty of care. There was nothing new in that principle. It has been the rule in contract since the decision in Czarnikow Ltd v Koufos [1976] 2 Lloyds Rep 457; [1967] 1 AC 350, if not before."

He goes on to explain at page 181:

"What was new and important in SAAMCO was the application of the principle to valuers so as to exclude their liability for loss due to a fall in the market: see Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190 at p.209 per Lord Hobhouse. Thus in a case of valuers, and their like, that is to say, those who undertake to provide specific information, the SAAMCO principle gave rise to a sub-rule that valuers are not generally liable (the word is that of Lord Hoffman at p.214) for all the foreseeable consequences of their negligence, but only for the consequences of the valuation being wrong."

[96] This case is not a case where the duty to provide information or to give advice dichotomy is of any relevance. In SAAMCO the results of the three appeals involved turned on the distinction drawn between the scope of these duties. The decision in SAAMCO may not be limited to valuers but the scope of the duty upon an alleged wrongdoer can only be ascertained under reference to the particular facts of the case.

[97] The defenders relied on the decision of Jenmain Builders Limited v Steed & Steed in support of their argument that the scope of the duty on the defenders in this case did not extend to allowing recovery for loss of profit. In that case the defendant firm of solicitors acted for the vendors of a property that had development potential. They also accepted instructions to act for the plaintiffs in the purchase of the property. The plaintiffs were property developers and were interested in developing the property with a view to resale. Subsequently another prospective purchaser emerged. The defendants received instructions from the vendors to proceed with the first purchaser who would exchange contracts. The defendants failed to inform the plaintiffs of the existence of a contract race and even although they had agreed a price of £67,500 for the property on behalf of the plaintiffs, the plaintiffs lost out because the other purchaser won the contract race in their absence. The plaintiffs sought damages amounting to the loss of profit they would have made upon the development of the site. At first instance the claim for loss of profit was dismissed and that decision was upheld by the Court of Appeal.

[98] At first instance the case turned on the trial judge's analysis of the purpose of Rule 6A(2) of the Solicitors' Practice Rules 1990. That Rule provides inter alia that a solicitor should not act for both the seller and a prospective buyer because of the risk of conflict. The trial judge held that a breach of that rule gave rise to a cause of action in tort, and having analysed the purpose of the rule, concluded that the scope of the duty extended only to wasted costs. In the Court of Appeal the leading judgment was delivered by Chadwick LJ and a great deal of what he says deals with the interpretation of that rule. However in dealing with the claim for loss of profit he also said at pages 625-626:

"This was a property with development potential. It is common ground that this property was no longer to be used as a village hall. It would have to be used for some other purpose; and there would have to be some development so that it could be used for that purpose. The question was: for what development could planning permission be obtained and how valuable would the property be on completion of that development? But those are the factors which a properly informed market will take into account in fixing the market value of property. The profit potential of the property is an element to be taken into account in fixing its market value. It is not suggested that there was anything special about this property to the appellants as purchasers. It is not suggested that there were not other developers in the market for property of this nature who could have made a proper assessment of the value of this property. The problem for the appellants in the present case is that they never sought to persuade the judge - and never adduced evidence to establish - that the market value of this property, Dukes Hall, was anything greater than the £67,500 which the Parish Council was seeking. It is for those reasons that the claim for loss of profits is one which the Court could not entertain in this case."

Having considered the decision in an unreported case in which the judge allowed a claim for loss of profits Chadwick LJ went on as follows at page 626:

"In the present case, there is no evidence that these appellants would not have been able to purchase other property in the market which they could develop profitably with use of the money which they did not lay out in the purchase of Dukes Hall. There is no evidence that the respondents insofar as their duty lay in contract were aware of any special circumstances which made it impossible for the [appellants] to employ their funds in the ordinary course of their business, or of any circumstances which suggested that this property was being sold at under value."

[99] Jenmain Builders Limited v Steed & Steed is a somewhat unusual case in that much of the discussion in the judgment of Chadwick LJ turns on the interpretation of the Solicitors' Practice Rules 1990. I am bound to say that I have some difficulty with Chadwick LJ's analysis set out in the preceding paragraph. I can see that in certain circumstances, such as in cases involving compulsory purchase, that the market value of heritable property can be assessed having regard to its development potential. However, in the situation under consideration by Chadwick LJ, the market value of the property could only be its value without particular regard to its development potential otherwise there would be little point in a developer wishing to acquire it for profit. In any event it does seem from what Chadwick LJ says that he was also influenced by the fact that in that case there was no suggestion the plaintiff developers did not have available to them a ready market in which to recoup their losses. That is not the position in this case where the particular nature of the pursuer's business at the time was one of developing New Town Georgian properties at the top end of the range and a reasonable substitute development opportunity did not become available. Furthermore, the case can probably be analysed as a failure to provide information type of case. On the whole I do not find the decision in the Jenmain v Steed & Steed case particularly helpful.

[100] In paragraph [75] I have set out the facts in the case of Oates v Anthony Pitman & Company. The defenders also relied on that case for this limb of their argument. In that case the plaintiffs also claimed damages for the loss of profits due to being restricted to carrying on the business of holiday letting for a limited period only during the winter. In dealing with that aspect of the claim, Sir Brian Neil referred to what was said by Lord Hoffman in SAAMCO in relation to the distinction between the measure of damages in an action for breach of a duty to take care to provide accurate information and the measure of damages for a breach of a warranty that the information is accurate. The measure of damages in tort is the extent to which the plaintiff is worse off because the information was wrong, whereas for a breach of a warranty, the measure is "the extent to which he would have been better off it the information had been right". Having set out what Lord Hoffman said, Sir Brian Neil dealt with the claim for loss of profits in the following way at page 696:

"It seems to me to follow from this analysis that, whereas in some cases where damages are claimed for breach of a warranty a plaintiff may be able to recover in respect of the profits which he would have made had the property purchased been in accordance with the warranty, such damages are not recoverable as a loss suffered by him by reason of having entered into the transaction. Moreover, it is to be noted that in Hayes [supra] at 820 Staughton LJ said that the judge had been right not to award the plaintiffs a sum for the profit which they would have made if they had operated the business successfully."

He then goes on to say at page 697:

"I turn now to loss of profits. I can deal with this aspect of the case very shortly. I am quite satisfied that this claim should be rejected. Such a claim might have been appropriate had the defendant firm given a warranty as to planning consent. But the lost profits were not losses caused by entering into the transaction. Ex hypothesi the lost profits could not have been earned had the transaction not been entered into."

It seems therefore that the loss of profit head of claim was rejected on the basis that if the solicitors had not been negligent the plaintiffs would not have purchased the property. If that is the rationale behind the decision then it is to be distinguished from the circumstances in this particular case.

[101] This is a case based on contract. The defenders do not dispute that they are in breach of a contractual obligation. The defenders undertook to deliver timeously the pursuer's offer for the premises. Mr Campbell characterised the failure as the breach of a duty of care and, as I have already indicated, Mr Murphy described the breach rather graphically as "black and white negligence". I do not doubt that to label what happened as negligent is wholly apt and that this can be described as a case involving professional negligence on the part of the defenders. However, simply to focus on a breach of a duty of care obscures the fact that the defenders' failure was in respect of a specific instruction given to Miss Docherty by the pursuer to do a particular act. The pursuer gave specific instructions for his increased offer to be presented timeously so that he could take his place in any queue of potential purchasers for the premises. The defenders, through Miss Docherty, by accepting these instructions, promised that they would put the pursuer into that position. Had the defenders fulfilled that promise then they would in fact have placed the pursuer at the front of the queue for the premises. The defenders would not have known that at the time but nevertheless their intention was to put the pursuer in a position where such a result may very well ensue. This was not a matter in which a solicitor had to exercise a degree of judgement or give advice, or where a solicitor failed to carry out an investigation which no solicitor exercising reasonable skill and care would have failed to carry out.

[102] Having undertaken to deliver the pursuer's offer timeously in their state of knowledge at the time it seems to me that the defenders assumed responsibility to protect the pursuer against the kind of loss he suffered. To say, as the defenders suggest, that the duty only extended to accepting responsibility for the negotiation of missives and any subsequent conveyancing is highly artificial in a context where the defenders knew that the ultimate purpose of what they undertook to do was to produce a result that was designed to provide the pursuer with the opportunity to acquire the premises in order to develop them. In my view the defenders' breach of contract cannot be divorced from the loss subsequently sustained by the pursuer. It was the defenders' duty in the circumstances to put the pursuer in a position where he could carry through his intention to purchase the premises. That duty extended to providing the pursuer with the opportunity of purchasing the premises against a background in which they knew that the pursuer intended to purchase the premises for development purposes. The loss sustained by the pursuer is the kind of loss against which the defenders were under a duty to protect him.

[103] In conclusion therefore I am of the opinion that the defenders are liable to make reparation to the pursuer for the loss of profit he suffered as a consequence of their failure.

 

Damages

[104] As I have already observed, the evidence on the development costs that would have been incurred came from Mr Ferrier. He explained that the exercise he carried out was standard process often done for developers. The report he prepared contains a detailed itemised description of the work that he envisaged would have been involved in the development process. In relation to the standard of finishings, he relied in particular upon the standard of finishings that the pursuer employed in his development of 2 Abercromby Place, Edinburgh. He assumed that the roof was in reasonable condition. In fact the evidence disclosed that it did require some work. According to Mr Cliff, the sum involved was about £20,000. A number of other items such as statutory notice repairs and the cost of sound tests and necessary repairs were also omitted. It is also the case that Mr Ferrier assumed that the pursuer's proposed timetable for the development and sales would be adhered to. Mr Ferrier's calculations brought out a total construction cost of £417,844.

[105] The evidence on the potential sale prices of the completed flats was given by Mr Craig. He also approached the task of valuation on the assumption that the pursuer's timetable would be adhered to. He assumed that the level of refurbishment that would have been carried out would have been of a high quality and aimed at the upper end of the market. Mr Ferrier in working out his costings did so on the basis of an average specification. The total sales figure produced by Mr Craig was £2,370,000.

[106] During the course of his submission on behalf of the pursuer, Mr Murphy produced a schedule which brought out a figure of £659,957.40 as the pursuer's loss based upon the figures produced by Mr Hardie and Mr Craig but also reflecting the evidence in relation to matters that Mr Ferrier in particular had not taken into account. That figure also assumed that the pursuer would have constructed 7 flats. Accepting that it was unlikely that the pursuer would have obtained planning permission for 7 separate flats Mr Murphy revised the figure downwards to £614,066. It was in respect of that sum that he invited me to grant decree.

[107] The defenders' approach to the issue of damages was somewhat different. That approach involved looking at the comparative profitability of previous developments carried out by the pursuer, five such developments being chosen for this purpose. That analysis disclosed that whereas the ratio of profit/capital costs and the profit/sale price figures historically disclosed an average of 20.4 per cent and 16.9 per cent respectively, the equivalent comparisons on the basis of the figures produced for the purpose of the litigation produced ratios of 47.5 per cent and 32.2 per cent respectively. The ratios based upon the pursuer's claim as revised in the course of Mr Murphy's submissions were 36.1 per cent and 26.5 per cent respectively. This analysis discloses that the pursuer's original hypothetical figures were double the historical averages and even his revised figures were substantially in excess of these averages.

[108] Although the exercises undertaken by Mr Ferrier and Mr Craig were perfectly legitimate and of necessity hypothetical, they did depend upon a number of assumptions. In reality the pursuer's proposed timetable was likely to have been delayed. Other factors such as development costs going over budget, delays in supplies and sales prices being lower than anticipated could also impact upon the figures. It is also the case that there was a mismatch in the assumptions made by Mr Ferrier and Mr Craig as to the standard of finishings that might have been involved.

[109] In my opinion the approach adopted by the pursuer to the issue of damages is too speculative. The defenders' approach has the attraction of being rooted in what had actually happened in the past. I propose therefore to adopt the defenders' general analysis by having regard simply to the profit/sale proceeds ratio approach but to use the average derived only from the New Town property developments, Nelson Street, Heriot Row and 2 Abercromby Place. I think that restricting the analysis to New Town properties is a fairer approach. On that basis, an average ratio of profit to sale proceeds of 17.4 per cent is produced. For this exercise I am prepared, as indeed the defenders had done for their analysis, to adopt the projected sale proceeds of £2,370,000 produced by Mr Craig's figures. Applying the average ratio of 17.4 per cent to that figure produces a figure of £412,380. That is the figure which I propose to include in the decree.

 

Interest
[110
] Mr Murphy argued that interest should run from July 2003 on the basis that by then there would have been receipt of income from the sales of flats. Mr Campbell did not disagree with the general approach but relying on the evidence as to the likelihood of some delay, proposed March or April 2004 as the appropriate date from which interest should run. Accepting that some delay in the timetabling was likely, I propose to find that interest should run at the legal rate of eight per cent from 1 October 2004.

 

Conclusion
[111
] I propose to sustain the first and second pleas-in-law for the pursuer and to grant decree to include the sum of £412,380. As the interest on that sum to the date of decree requires to be calculated and hopefully agreed between the parties the case will be put out By Order for that purpose. I shall reserve the question of expenses until then.

 

 


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