A developer can recover loss of profits as a result of being prevented by a contractor’s negligence from financing future developments.
The High Court has clarified the extent to which damages can be recovered for loss of development opportunities caused by a breach of contract
On 19 March 2005, a fire caused during snagging works by the negligent use of a blowtorch by a plumber employed by the Defendant substantially damaged a property at No. 35 Cambridge Road, Dunton, Bedfordshire which had been developed by Aldgate along with an adjoining property. Aldgate was eventually compensated by its insurers for the cost of repairing the property but claimed damages against the Defendant in excess of £750,000 for loss of profits on the basis that the delay in receipt of funds from the sale of the damaged property had prevented it from purchasing similar sites in the interim.
Aldgate claimed that it had an established practice and policy to acquire and develop dual property sites as there were substantial economies of scale in building two houses together rather than just one. As a result of the fire, No 35 was not sold until December 2006 for £500,000 and, pending receipt of these proceeds, Aldgate claimed they had been only able to fund single property developments.
It was agreed that the average profit made per single house developed was £153,000 and Aldgate asserted that it had lost out on building and selling 4 properties over a period from May 2005 to the Autumn of 2008 when the market was buoyant. It also claimed for the loss of the additional profit it would have earned if it had been able to work on two properties on one site at a time.
It was ultimately accepted by the Defendant that it was within the parties’ contemplation that a fire at No. 35 might cause Aldgate to lose further development opportunities of this type and that, accordingly, damages would be recoverable for the foreseeable losses suffered in this respect.
It was the Defendant’s case that the most that Aldgate could establish would be the loss of one single development and the Court had to analyse what opportunities had been lost and losses suffered as a direct result of the delays experienced by the damage and rebuilding of No. 35 and the lack of finance available to Aldgate during this period of time. Given that Aldgate was a family company which did not rely upon bank funding, the Court held that it was reasonable for it not to have secured financing to have allowed it to purchase other properties sooner given that the terms for such financing would have been onerous and would have involved the Directors having to give personal guarantees.
The Court made clear that the following steps had to be followed when assessing the damages recoverable. The first step is to determine the extent of the foreseeable loss. The second is to decide whether, on the balance of probabilities, the loss claimed has actually been caused by the breach of contract. The third is to eliminate those losses which have been caused by another event and do not relate directly to the breach of duty by the Defendant.
After analysing the facts to establish the extent of losses which were a direct result of the fire, and determining that it would have taken 19 months for Aldgate to acquire dual development sites and obtain Planning Permissions and carry out design works for each development, the Court held that Aldgate had missed out on the development of 3 properties. After giving credit for other profits made, it awarded Aldgate damages of just over £400,000 together with interest and costs.
The Court rejected the Defendant’s claim that Aldgate had not done all that was reasonably required to mitigate its losses and made the point that these losses had actually been exacerbated by the fact that it was the Defendant who had denied liability and refused to compensate Aldgate for any of the losses it had claimed.