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Barrowfen Properties Limited v Patel

In this article, Shail Patel KC and John Williams analyse the recent Court of Appeal decision in Barrowfen Properties, with a focus on the court’s findings on loss of a chance. It’s a must-read for any practitioners dealing with loss of a chance claims; and the case gives important guidance on how loss of a chance principles interact with the rules on mitigation, causation, and the quantification of damages.

Roger Stewart KC of 4 New Square Chambers acted for the Second Defendant solicitors’ firm. Shail Patel KC acted for Suresh Patel in the earlier Company’s Court proceedings.

Background – Barrowfen’s Development Plans

The Claimant (‘Barrowfen’) held the freehold of large commercial premises in Tooting, South London (‘the Property’). This was the company’s principal asset. The Property had been purchased by Barrowfen shortly after its incorporation in 1984, and Barrowfen charged the Property in March 1990 to secure a long running commercial loan facility (‘the Zurich loan’).

Barrowfen intended to develop the Property, and on 16 October 2014, it obtained permission for a development scheme including 78 hotel bedrooms, 99 student rooms, and retail premises (‘the Amended Original Development Scheme’). Despite this permission being obtained, the scheme was never built. Instead, in June 2018, a further permission was granted (‘the Revised Development Scheme’). A s.106 agreement was in place by August 2018, and work began on the development of this scheme shortly thereafter. The work was completed in April 2021.

Barrowfen’s claim was brought against one of its directors at this time, ‘Girish’ (the First Defendant); its former solicitors ‘S&B’ (the Second Defendant), and a new company called ‘Barrowfen II’ which was controlled by Girish (the Third Defendant).

The Dispute

Barrowfen’s main head of claim was for losses arising out of its failure to pursue the Amended Original Development Scheme. Had it not been for the Defendants’ breaches of duty, Barrowfen said, it would have:

  1. Completed work on the Amended Original Development Scheme by August 2016. On this scenario, Barrowfen lost the benefit of 55 months of rental income – that being the period between August 2016, and April 2021, when rents were received after completion of works on the Revised Development Scheme.
  2. Alternatively, it would have completed work on the Amended Original Development Scheme by December 2017 – with the loss of rental income on this scenario running to 39 months.

Barrowfen also claimed for various other costs and expenses.

The delays and changes to Barrowfen’s development plans were caused by a tussle for control of the company, which was ongoing between July 2013, and September 2016.  The protagonists were three brothers: Girish (the First Defendant), Suresh, and Prashant. Girish was a director of Barrowfen, and acted as the company’s sole managing director between 1994 and August 2013. Suresh was also a director of Barrowfen from 2002. In summer 2013, Suresh and Prashant raised concerns about Girish’s management of Barrowfen, and in August 2013 Prashant asked to be appointed as a third director. Thereafter, Girish set out to prevent Prashant’s appointment, and to retain personal control over the company.

Girish’s strategy included a plan to take control of the Property, through an elaborate scheme to force Barrowfen into administration. Girish set up a new company (the Third Defendant, ‘Barrowfen II’) which took an assignment of the benefit of the Zurich loan from Zurich. As creditor, Barrowfen II (under the control of Girish) called in the loan, forcing Barrowfen into administration. Girish then attempted to persuade Barrowfen’s administrators to market the Property for sale.

These strategies ultimately failed. Prashant was appointed as a director of Barrowfen in December 2015; and although Girish succeeded in forcing Barrowfen into administration, control of the company was returned to its directors (Suresh and Prashant) in September 2016.

Barrowfen was then in a position to restart work on developing the Property. But during the events outlined above, Waitrose – the anchor tenant of the Amended Original Development Scheme – had pulled out of the project. Barrowfen therefore took the decision to draw up and implement a new revised scheme – the Revised Development Scheme. Permission for this development was obtained by June 2018, and work was completed in April 2021.

The Claims and the Judgments

Barrowfen brought claims in the High Court against Girish and Barrowfen II. Barrowfen also claimed against S&B, which acted for both Barrowfen and Girish in relation to various matters pertaining to the internal disputes from February 2014 onwards, and which advised Girish and Barrowfen II on Girish’s plans to force Barrowfen into administration.

The Main Judgment

Mr Justice Leech handed down judgment in the case on 21 July 2021 (‘The Main Judgment). The judge divided Barrowfen’s claims into two categories, and made the following findings:

  1. The Company Claims. These claims were brought against Girish and S&B, and concerned numerous alleged failures of corporate governance in the period November 2013 to July 2015. As against Girish, the judge found that he had acted in breach of his duties as a director in respect of the steps he took to prevent Prashant being appointed as director, and to maintain personal control over Barrowfen. S&B was in turn found to have been negligent in failing to address the conflicts of interest which existed between Barrowfen and Girish.
  2. The Administration Claim. This claim related to events between October 2015 and February 2016, and the steps taken by Girish and Barrowfen II to put Barrowfen into administration. The judge again found that Girish breached his duties as director of Barrowfen by pursuing this scheme. S&B were again held liable in negligence for failing to address the conflicted position of both Girish and S&B.

The judge went on to consider causation, loss, and ‘loss of chance’.

The judge found that but for the Company Claim breaches, there was a good chance that Prashant and Suresh would have taken control of Barrowfen sooner. They could have pressed ahead with the Amended Original Development Scheme, with a view to completing construction in September 2016 (‘Scenario 1’). He assessed the probability of achieving Scenario 1 at 60% [622].

Alternatively, had it not been for the Administration Claim breaches, there was a very good chance that Barrowfen could have avoided administration, and completed construction under the Amended Original Development Scheme by January 2018 (‘Scenario 2’). The chances of this were assessed at 80% [630].

As a result:

  1. Under Scenario 1, Barrowfen lost the chance of receiving net rents for 55 months, and of saving various other costs. These sums totalled £4,822,797.09. The judge set off against this the figure of £2,508,182, to reflect the increased capital value of the scheme Barrowfen actually built, which was worth substantially more than the hypothetical Amended Original Development Scheme which could have been completed in September 2016. The net total loss was therefore £2,314,615.09. To this figure was applied a 60% loss of chance discount (the risk of Scenario 1 not eventuating) leaving a final total of £1,388,768.05 [679].
  2. Under Scenario 2, the total figure for loss of net rents for 39 months, and associated costs, came to £3,498,157.09. Following the deduction for increased capital value (£2,508,182) and the application of an 80% multiplier, this resulted in a final figure of £791,980.07 [681].

In the Main Judgment, the judge awarded damages of £1,388,768.05 (the final Scenario 1 figure) on the basis that the two claims were “true alternatives and that they do not overlap” [681]. But permission was given for further submissions to be made on this, and on the correct approach to deducting the credit of c.£2.5m.

The Reserved Matters Judgment

A further judgment was handed down which revisited some of these (and other) matters on 22 June 2022 (‘The Reserved Matters Judgment). The following points are relevant to the appeal:

Accounting for additional profits – the judge affirmed his initial approach of deducting the increase in capital value (£2.5m) from the total loss figure on both Scenarios 1 and 2. This benefit was not a res inter alios, or collateral [64]-[68]; it formed part of the same continuous transaction begun by the Defendants’ breaches of duty [68]. It therefore needed to be brought into account in calculating Barrowfen’s overall loss.

Future Finance Costs – the judge refused to bring future finance costs within the scope of the overall loss calculation. These were the costs which Barrowfen would incur if it held the development, rather than selling it and realising its capital value. If brought into account, these sums were sufficiently large to negate any credits accruing to Barrowfen for increased capital value.

The judge held that even if Barrowfen could prove an intention to hold the Property in the long term, it was right (as a matter of law) to adopt an “investor agnostic valuation” rather than a “Barrowfen specific valuation” [72]-[73]. This meant valuing the Property based on the amount for which it could be sold on the open market at completion. The Defendants could not be held liable for the costs to Barrowfen of its decision to keep possession of the Property.

The Loss of Chance calculation – the judge approved of his earlier decision to apply the percentage loss of chance multiplier to the net figure, after the deduction of the increased capital value sum (£2.5m) [97]. He rejected S&B’s proposal of applying the loss of chance multiplier before the deduction, which would have significantly reduced overall recoveries.

The Cumulation Issue – the judge revised his approach to quantum overall. In the Main Judgment, he awarded £1,388,768.05, to reflect the loss of chance in Scenario 1 alone. This followed from the judge’s provisional finding that the claims under Scenario 1 and Scenario 2 were ‘true alternatives’, which could not be combined (Main Judgment [681]).

On reflection, the judge held that these claims were cumulative. If the 60% chance of achieving Scenario 1 did not eventuate, the residual 40% chance needed to be considered. The judge found that of that 40% chance, there was a 32% (i.e. his original 80%) chance of achieving the Scenario 2 outcome, and an 8% residual chance that there would have been no earlier development than actually took place. This resulted in an additional award of £316,792.03 [110].

This amount reflected the value of the 32% chance, which was calculated as follows:

40% (the residual loss of chance) x 0.8 (the chance of recovering under Scenario 2 based on the Administration Claim breaches) = 32%

0.32 x £989,975.09 (the total net loss figure in the Administration Claim) = £316,792.03

The Court of Appeal’s decision

Two key points on loss of chance came before the Court of Appeal. First, Barrowfen appealed the decision that it should give credit for the increased capital value of the Revised Development Scheme. Second, S&B cross-appealed, arguing that the judge should have applied the loss of chance percentage before, rather than after, deducting the £2.5m credit.

Credit for Capital Value Increase, and adding Future Financing Costs

The Court of Appeal upheld the judge’s decision to apply the £2.5m credit to the calculation. In doing so, the court placed particular emphasis on (1) the compensatory function of damages, and (2) the application of the principles of causation and mitigation, as developed in the leading contract law authorities of British Westinghouse and Fulton Shipping [76]-[86].

Snowden LJ (giving the leading judgment) held that credit should be given where the benefits were causally connected to the breaches of duty for which damages were awarded, or where they resulted from attempts to mitigate loss. On the facts, both tests were satisfied. The Defendants’ breaches of duty, Barrowfen’s losses of rental income, its additional costs of development, and the eventual completion of the Revised Development Scheme, formed part of the same continuous course of events [103]. All of the losses and gains across this period fell to be taken into account.

The Court of Appeal also agreed that future financing costs could not be brought into account to negate this credit. When the Revised Development Scheme was completed in April 2021, the clock stopped. At that point, it was open to Barrowfen to sell the development, to realise the profits from doing so, and to reinvest them elsewhere. Barrowfen had to bear the consequences of its commercial decision not to sell, and any losses flowing from that decision [103].

The Loss of Chance calculation

The Court of Appeal also upheld the judge’s decision to apply loss of chance percentages after, rather than before, the deduction of the £2.5m credit. The Court of Appeal explained this point in two ways.

The first explanation [121-125] was that the two cumulative counterfactuals applied by the judge amounted to a 92% chance that Barrowfen would have carried out the Amended Original Development Scheme.  There was a residual 8% chance that it would not. It was, therefore, only right to bring 92% of the £2.5m credit into account, and no more. This was achieved by deducting the credit before applying the loss of chance discount. On the 8% counterfactual:  “the breaches of duty and negligence could not be said to have caused Barrowfen to receive any benefit, since it would have carried out the Revised Development Scheme of its own accord” [124].

The second explanation was based on Hartle v Laceys [1999] Lloyd’s Rep PN 315 . Barrowfen had argued that Leech J was bound to deduct the credit first because of this decision of the Court of Appeal. In giving permission to appeal, Lewison LJ had considered it indistinguishable but noted that the court had “found the point difficult” [71].  S&B argued that there could (now) be no doubt that Barrowfen had obtained the benefits of the Revised Development Scheme and so credit should be given for the entire amount.

In Hartle, a vendor lost the chance of selling property before a slump in the market. The proceeds of the lost sale would have been £360,000, and the proceeds received from the actual sale were £150,000. The judge applied the percentage chance of selling at the higher price (60%) to the net difference between these positions (£210,000), rather than to the £360,000 followed by a deduction of £150,000. In other words, he gave credit for the actual benefit before applying the discount, as Leech J did here.

Snowden LJ summarised the reasoning in Hartle as follows:

The key to Ward LJ’s reasoning was his characterisation of the case as one in which the negligence of the defendant caused the claimant to lose the opportunity to get the difference between the higher price of the intended sale to the developer and the lower price of the sale that actually took place later.”

The point could be tested this way; if Barrowfen’s developer’s profit had been reduced by the negligence, this would be the difference between the hoped for profit and actual profit, with the result discounted to reflect the possibility that it would have happened anyway. This is true despite the fact that at trial the fact of that loss could be regarded as a certainty since it had eventuated. By the same token, the fact that (as S&B argued) the benefit had actually eventuated does not mean it was always certain to eventuate.

Implications

Snowden LJ’s commentary on Hartle (quoted above) seems especially important and useful. It reminds us that when dealing with a loss of a chance case, the aim is to assess the loss of a chance to make a particular gain. This highlights the fact that there are two distinct stages to the inquiry. First, identifying the ‘gain’ which the Claimant could have made. Second, calculating the ‘chance’ of obtaining that gain. This would appear to provide a firm foundation for why the loss of chance percentage should be applied after rather than before the deduction of credit. The credit is brought in at stage 1, in calculating Barrowfen’s total lost ‘gain’. The percentage is then applied to the overall gain at stage 2.

To look at it from the perspective of the credit alone, under Scenario 1 credit was given for 60% of the increased developers profit of £2,508,182, i.e. £1,504,909.20. Under Scenario 2, credit was given for 32% (which assumes scenario 1 did not take place), of a further £802,618.24. The total credit was the sum of these figures, i.e. £2,307,527 – or 92%, reflecting the 8% chance that the original development plan could never have been implemented, and the additional development profit thus never earned. This calculation provides a useful cross check on the (perhaps) more intuitive two step approach described above.

While this result is not surprising on the facts, the decision underscores some of the conceptual difficulties which can arise, and the need for a robust and methodical approach to quantification in loss of chance cases; particularly where mitigation and credit must be taken into account.

Related areas

Related People

Roger Stewart KC

Call: 1986 Silk: 2001

Shail Patel KC

Call: 2006 Silk: 2024

John Williams

Call: 2017

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