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market falls and actionable losses

15 January 2014
John Grimes Partnership Limited v Gubbins [2013] EWCA Civ 37 and the consequences of this decision

Background
Mr Gubbins, a property developer, instructed John Grimes Partnership Ltd (JGP), an engineering consultant, to design and build a road and drainage system on some residential development property. The agreed completion date was March 2007. Following significant delay in the works, however, Gubbins replaced JGP with another firm in April 2008.

JGP sought to recover around £3,000 in unpaid fees. Gubbins counterclaimed for the return of fees already paid and additional damages arising from JGP’s failure to meet the completion deadline. Amongst other allegations, Gubbins claim that, as a result of the delay, the market value of the private residential units had declined, the housing association’s offer for affordable units had been reduced and the overall building costs had increased.

At first instance
The court found that JGP’s delay amounted to a breach of contract. Expert evidence also showed that at the intended completion date, the property was worth £3.8 million, but by the actual completion date, over a year later, it was £398,000 lower. Therefore, the key issue was whether the losses were too remote to be recovered.

The court applied the standard Hadley v Baxendale test and found that, the risk of the decline in value of the property during a substantial period of delay would have been within the reasonable contemplation of the parties when the contract was formed. It was therefore held that JGP was liable for the loss of market value.

On appeal
The Court of Appeal upheld the decision and reasoning at first instance and the appeal was dismissed.

Sir David Keene, giving the leading judgment, noted that although the ‘traditional’ approach to establishing remoteness (as set out in Hadley and subsequently restated), the key issue in identifying whether loss was too remote was to establish what the parties ought reasonably to have contemplated would result from a breach of the contract.

Generally speaking therefore, where there are no express terms dealing with liability, the law implies responsibility for losses which are reasonably foreseeable to the parties and ‘not unlikely’ to result from a breach. However, the House of Lords, in Transfield Shipping Inc v Mercator Shipping Inc [2008] (‘The Achilleas’), held that the commercial circumstances of a contract, may indicate that the parties did not intend for certain losses to be recoverable, even where reasonably foreseeable (and thus not too remote under the traditional test).

However, JGP had failed to establish the “general understanding or expectation in the property world” that a party in its position would have avoided liability for losses caused by market fluctuations ‘where there had been negligent delay’. Although JGP could not control the property market, it had not been established that this was the type of exceptional envisaged in The Achilleas.

The Court of Appeal accepted JGP’s argument that very few judgments in property cases held that a decline in the property market during a period of delay had given rise to an actionable loss. However, it pointed out that there were also few cases deciding the other way. Furthermore, the judgment in South Australia Asset Management Corp v York Montague Ltd [1997] (SAAMCO), was distinguished, on the basis that it did not consider the issue of negligent delay.

Finally, the Court of Appeal was not impressed by JPG’s argument that the damages would be disproportionate and held, following Siemens Building Technologies Ltd v Supershield Ltd [2010] that the traditional approach applied even where substantial damages flowed from a contract under which only a small fee was payable.

Case comment
It can no longer be assumed that a property market fall will always be irrecoverable loss. Such a decline may well be recoverable within the traditional Hadley approach to remoteness. A party relying on The Achilleas, will need to establish that it is common practice to exclude liability for particular types of loss. This is a high hurdle to overcome.

In addition, although JGP cited SAAMCO to support its argument that a market fall was considered not to be actionable loss, the two judgments should be distinguished. Here, the negligent delay had a direct impact on the timing of the claimant’s interaction with the market. In, SAAMCO, however, it was the content of a valuation report that was negligent. The report itself was provided on time.

This is unlikely to be the last word on the subject. The judgment notes that liability for a market decline was appropriate “in this specific contract” and drawing general rules from remains difficult. It seems likely that judgments in property cases from the period 2007-2009 will continue to throw out some surprises.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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