UK: Lost Opportunity In The Downturn

The Court of Appeal in the recently reported judgment in Mallon v Halliwells (in administration) [2012], confirmed the principles to be applied when assessing losses arising from the negligent drafting of a commercial agreement, in particular the date when loss should be assessed and the application of the loss of a chance doctrine. In this case, the Claimant had not sought to rely on the rights he should have had but for the negligence until some time later than the breach of duty, by which time the value of those rights had deteriorated substantially.

Background

Halliwells acted for Aztec Developments (North West) Ltd ("Aztec") in connection with a joint venture agreement with Pierse Contracting Ltd ("Pierse") for the development of an apartment block. The development was to be carried out through a newly formed company, Brickpaper Ltd ("Brickpaper") which was owned jointly by Aztec and Pierse. It was agreed between them that once the joint venture was complete, the freehold to the site was to be sold to a third party and Mr Mallon, who was the majority shareholder in Aztec, was to receive the proceeds. However, Halliwells failed to include that provision in the agreements, which were completed in April 2005.

As at April 2005, the parties to the joint venture reasonably expected that the development would be practically complete in July 2006 and that all the flats and parking spaces would be sold within 6 months of completion. On that basis, the loans secured on the freehold would be repaid in full and the charges over it released. Brickpaper would then be able to sell the unencumbered freehold, then worth around £249,000, and pay over the sale proceeds to Mr Mallon.

However, the project was not a success. The development was not completed until late 2007, far later than had been anticipated. By the autumn of 2008, only around 80% of the apartments and 30% of the parking spaces had been sold and the combined value of the unsold units was significantly below the balance outstanding on the secured loans. Following the collapse of Lehman Brothers in September 2008, the market was significantly restricted and it was not possible to predict when, or indeed if, the remaining properties would be sold for sufficient money to repay the charges on the site and enable the unencumbered freehold, then worth around £226,000, to be sold.

At that time, Mr Mallon was also under financial pressure and was looking to realise his assets, where possible. He entered negotiations with Pierse culminating in an agreement in December 2008 under which Pierse bought out Aztec's interest in Brickpaper. It was in the course of those negotiations that Mr Mallon first learned of Halliwells' failure to include his right to the value of the freehold in the original agreement. This prompted him to bring a claim against Halliwells for the losses caused by the omission.

The claim

Mr Mallon claimed that Halliwells acted for him personally as well as for Aztec and that they had breached their duties to him in failing to ensure that his right to the value of the proceeds was included in the documentation giving effect to his agreement with Pierse. He claimed, therefore, that he had lost the value of the freehold.

Halliwells denied any contractual relationship but admitted that it owed a duty of care to Mr Mallon and that it had acted negligently in failing to include the relevant provision in the agreement. The issue for the court was whether the admitted negligence had caused Mr Mallon to suffer any loss.

The first instance decision

Mr Mallon contended that he had lost the value of the freehold reversion as at April 2005 on the basis that the general or usual rule was that the loss ought to be assessed at the date of the breach of duty. Alternatively, he claimed that he had lost the chance to dispose of the right in or after autumn 2008, when he was looking to dispose of his interest in the joint venture.

The trial judge rejected Mr Mallon's primary argument and assessed the loss in autumn 2008. He referred to the principles summarised in County Personnel v Pulver [1987] 1 WLR 916 including the overriding rule that the measure of damages is the sum of money which will put the injured party in the same position as he would have been if he had not sustained the wrong for which he is to be compensated. In addition, while the general rule is that damages are assessed at the date of breach, this rule also should not be mechanistically applied in circumstances where assessment at another date may more accurately reflect the overriding compensatory rule.

Looking at the facts of this case, therefore, whilst it was true that Mr Mallon had been deprived of an asset that he should have had in April 2005, there was no question of his realising any value for it prior to July 2008. Before that date, Mr Mallon did not know that he did not have the right that he had bargained for and made no attempt to sell it. The judge considered it to be "a nonsense" to assess damages for a loss of a chance as at a date when Mr Mallon believed he had the right and was not seeking to dispose of it.

What Mr Mallon had lost, therefore, was the chance to sell the prospective right to receive the value of the freehold in the autumn of 2008. In assessing that lost chance, the judge applied the well established law as stated in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602. Accordingly, Mr Mallon had to prove first, on the balance of probabilities, that he would have attempted to dispose of his right to the proceeds of sale in autumn 2008 and secondly, that his chances of doing so were real and substantial, as opposed to merely speculative.

Mr Mallon's case was that he could have sold his right either to Pierse or to a third party. As far as the first hypothesis was concerned, the Judge accepted that Mr Mallon would have attempted to sell the right to Pierse in the course of the negotiations for the severance of the joint venture in the autumn of 2008. However, Mr Mallon did not present any evidence as to what Pierse might have been prepared to pay for the right, what he might have been prepared to accept for it or indeed any objective evidence of its value at that date. The judge found, therefore, that the likely outcome of negotiations with Pierse was a matter of pure speculation and he was unable to conclude that Mr Mallon had any real chance of obtaining any payment for his right from Pierse.

The alternative case failed on both premises. The judge did not accept that Mr Mallon would have attempted to sell his right to a third party and, in any event, he was not persuaded that Mr Mallon had any real or substantial chance of obtaining any sum for his right at any time from autumn 2008 to the date of trial. On any view, it was clear that the development was in negative equity in the autumn of 2008 and remained so right up to the date of trial. Any investment in it would be seen as entirely speculative and there was no evidence before the court as to what its value would have been. Mr Mallon had, therefore, not suffered any substantial damage and his claim failed.

The appeal

Mr Mallon appealed on two issues, as follows:

Date of loss

Mr Mallon challenged the Judge's finding that his loss should be assessed in 2008. He argued that he had suffered a loss in April 2005, when he would have acquired the right but for Halliwells' negligence. The fact that he did not know he had suffered the loss was, he said, irrelevant.

The Court of Appeal affirmed the Judge's decision. In his leading Judgment, Lord Justice Hooper noted that "damages for breach of contract or a tort are principally designed to compensate a person for a loss which he has actually suffered as a result of the contractual breach or tort". He referred as authority to the case of Kennedy v Van Emden [1996] PNLR 409 which confirms that "compensation is a reward for real not hypothetical loss". Mr Mallon had not tried to sell the right before autumn 2008 and in thosecircumstances he suffered no actual financial loss before that date. Before then, any loss was only hypothetical and, therefore, the appeal on this ground failed.

The loss of a chance

In this part of the appeal, Mr Mallon sought to attack the judge's conclusion that his chances of disposing of the right for value to a third party were speculative.

Mr Mallon had not offered any evidence of the value of the right or what an investor might be prepared to pay for it on any date. Halliwells' expert had produced a supplemental report on this during the trial, at the request of the judge. In that report, he expressed the view that an investor would consider an option or conditional contract to acquire the right but that, given the state of the market in 2008, would not wish to do so because the risk of receiving nothing would be too great. In cross examination he had conceded that a speculative investor might have been prepared to buy the right at a price to reflect a discount to the freehold's full value but said that he could not put a figure on what that price might be. The judge, however, had declined to place any weight on that evidence and found that the expert's opinion was that set out in his written report.

Mr Mallon relied on the expert's concession that an investor would have considered buying the right in 2008. The fact that he could not put a value on the right was irrelevant. It was for the judge to give a value to the right.

The Court of Appeal rejected Mr Mallon's appeal on this point too. The judge was fully entitled to reach the conclusion that he could not put any value on the right, even taking account that someone might pay something for it. It was for Mr Mallon to put a value on the contractual right and this he had failed to do.

Comment

Whilst the judgment contains few surprises, it is a reminder of the general principles to be applied in a loss of a chance claim and of the evidential difficulties that they present. One of the common themes running through this case was the lack of evidence on which the Judge could make a finding that Mr Mallon had lost anything of value. The threshold for claimants in loss of a chance claims is low in that they do not need to prove their losses on the balance of probabilities and it is not a bar to recovery that the amount of the loss is difficult to ascertain. However, no damages will be awarded if the losses depend on very remote and hypothetical possibilities. The loss of a chance doctrine does not, therefore, relieve claimants of any burden of proof in relation to their loss and identifying the line between real/ substantial and wholly speculative losses remains difficult and highly fact sensitive in every case.

The case also confirms the appropriate date that the claimant's loss should be assessed when a solicitor's negligence causes the loss of a right which could have been exercised immediately but which, in fact, the Claimant did not seek to exercise until some years later, at which time the value of the right involved had substantially decreased. This type of issue has no doubt become more common following the property downturn, as claimants seek to find a way to recover damages despite the fact that the hoped-for profits would not have materialised from the property or venture regardless of the negligence. Although the case follows established principles, it is comforting that the Court of Appeal has reaffirmed them.

Clyde & Co acted for the Defendant in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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