PRINCIPLES OF MITIGATION OF LOSS & THE CREDIBILITY OF EXPERT WITNESSES: A HIGH COURT DECISION CONSIDERED

The case of Hirtenstein -v- Hill Dickinson LLP [2014]  EWHC 2711 (Comm) where judgment was given today contains many interesting lessons for those involved in professional negligence litigation in particular.   Here I just want to concentrate upon two: (i) principles relating to mitigation of loss; (ii) expert evidence.

THE ISSUES AT TRIAL: NEGLIGENCE AND CAUSATION

The case related to alleged professional negligence in failing to obtain a personal guarantee from a vendor upon the purchase of a yacht.  The judge found that there had been negligence in that a personal guarantee had not been included in a document; however there was no causation as the proposed guarantor would never have agreed to such a clause and the purchaser would have proceeded in the absence of a guarantee in any event.

THE ISSUES OF INTEREST TO US: THE LAW RELATING TO MITIGATION A

One of the issues in the case (which did not ultimately need determining) was the costs of bringing the yacht back up to standard.  The claimant had extensive works done on the yacht, including the purchase and fitting of new engines.  All of this expenditure was claimed from the defendant.

1. Mr Hirtenstein nevertheless decided to opt for the “repower” and to replace both main engines with brand new Caterpillar engines, for which he also bought a five year warranty. The claimants have argued that this was a reasonable and sensible thing to do and that the costs incurred would therefore have been recoverable in a claim for breach of warranty.
2. This argument, and indeed the claimants’ whole approach to this part of the case, rested in my view on a confusion about what the principle of mitigation involves. The principle is often expressed by saying that a claimant has a duty to take reasonable steps to mitigate his loss. However, this formulation has the potential to mislead in so far as it may suggest that a claimant who acts in a way which is reasonable in terms of his own preferences and priorities cannot be in breach of this ‘duty’. In truth, there is no duty to mitigate in that a claimant who does not mitigate his loss does nothing wrong: see e.g. The Solholt [1983] 1 Lloyd’s Rep 605, 608. The true principle is that, where there is more than one option reasonably available to the claimant in responding to the consequences of the defendant’s breach of duty, the claimant can only recover as damages the cost of the less (or least) expensive option. If the claimant in fact chooses a more expensive option, this does not mean that he is acting unreasonably; but the additional cost is regarded as a consequence of the claimant’s choice and not of the defendant’s wrong. So, for example, in Darbishire v Warran [1963] 1 WLR 1067 the plaintiff had his damaged motor car repaired at a cost which exceeded its market value. The Court of Appeal held that, while the decision to repair the car may well have been reasonable so far as the plaintiff was concerned, he had nonetheless failed to mitigate his loss because there was a cheaper option reasonably available of writing off and replacing the car. The damages were therefore limited to the market value of the car in undamaged condition. Harman LJ said (at p.1072):

“The judge here held that the plaintiff was reasonable in having the car repaired notwithstanding that the cost was more than twice the value. It may well be that the plaintiff, so far as he himself was concerned, did act reasonably and that what he got was of more value to him than the damages represented by the value of the car. … In my opinion the judge asked himself the wrong question. The true question was whether the plaintiff acted reasonably as between himself and the defendant and in view of his duty to mitigate the damages.”

Acting reasonably ‘as between the claimant and the defendant’ means choosing the cheapest reasonable option.

1. I accept that it was a reasonable choice, in circumstances where the engines were old and one of them needed to be completely rebuilt or replaced, for Mr Hirtenstein to decide instead to incur the additional expense of installing new engines. However, there were other choices which would also have been reasonable – namely, having the starboard engine rebuilt or replaced with a reconditioned engine and any necessary repairs done to the port engine. It is also clear that installing new engines went beyond what was necessary in order to restore the Yacht to its warranted condition and put the Yacht into a significantly better condition. A claimant may be entitled to recover the costs of replacing old with new if there is no reasonable alternative: see Harbutt’s ‘Plasticine’ Ltd v Wayne Tank and Pump Co. Ltd [1970] 1 QB 477 at 468, 472-3, 476;Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397; Lagden v O’Conner [2004] 1 AC 1067, para 34. In this case, however, there was a reasonable alternative, and Mr Hirtenstein’s decision to purchase new engines was a matter of choice.
2. I therefore think it clear that, insofar as the costs incurred in replacing the Yacht’s engines exceeded the reasonable cost of rebuilding or replacing the starboard engine together with the cost of any work needed on the port engine, those costs would not have been recoverable.
3. It is also clear that Mr Hirtenstein took the opportunity while the Yacht was in dry dock to carry out a major refit. Again, there was nothing unreasonable in deciding to do this. But no credible evidence was put forward to show that this work was needed in order to repair breaches of the condition warranty. It is an unattractive feature of the way the claim was presented that the claimants and their expert Mr Smith attempted to characterise much of this work as repairs and thereby recover the costs from the defendant.

THE EXPERT EVIDENCE

The judge clearly had major reservations in relation to the claimant’s expert.  There had been no attempt to differentiate between the upgrading of the yacht and the expenses needed to bring it up to standard.

Cost of repairs – Mr Smith’s evidence

1. The claimants’ engineering expert, Mr Smith, assessed the cost of restoring the Yacht to its warranted condition in the sum of US$2,381,760. Mr Smith was provided with a spreadsheet listing all expenditure on the Yacht in the period July 2010 to April 2012, totalling US$2,850,118. The person (not identified by Mr Smith) who prepared the spreadsheet had already allocated the expenditure in columns between repairs, routine maintenance, upgrades and a category headed “questionable”. Mr Smith said that his instructions were to analyse the costs and to allocate them, including those marked as “questionable”, to the correct category.^[4]
2. None of the “questionable” items was classified by Mr Smith as an upgrade; nor did he classify as an upgrade any item which had been provisionally categorised as a repair or as routine maintenance. However, it is only necessary to read through the schedule of purported repair costs appended to Mr Smith’s report for it to be obvious that they include numerous items such as attorney’s fees (which Mr Smith was completely unable to explain) and a vast array of fittings and accoutrements, computer equipment and office supplies etc which are palpably unjustifiable. As these items evidently include a complete refit of the galley, it may truly be said, as Mr Tozzi, acting for the defendant, observed, that the claim includes the kitchen sink.
3. The careless way in which Mr Smith approached his task can be gauged by the fact that approximately three pages of items which appeared in Mr Smith’s schedule of upgrades also appeared in his schedule of repairs. When asked about this, Mr Smith said that his error was to have included the sums in the schedule of upgrades. The sums in question included items such as guest bedding (US$13,549), main salon furniture (US$30,124), napkins and placement settings (US$17,174) and wine glasses (US$792) – to take just a few examples. Mr Smith’s explanation of why he considered that these and very many other sums which appeared, to say the least, questionable should be classified as repairs rather than upgrades was that he had assumed from the fact that they were purchased that it must have been necessary to purchase them in order to bring the Yacht up to the warranted standard, and not simply a choice of the owner to do so. Mr Smith agreed that he was therefore, in effect, assuming the answer to the question that he had been asked.
4. Another unsatisfactory feature of Mr Smith’s evidence was that he attached to his supplemental report an appendix itemising expenditure totalling US$734,161 headed “costs for repairs to restore Il Sole to warranty standard (2)” which he was completely unable to explain. The appendix was not mentioned anywhere in the body of the report and Mr Smith had a “suspicion” that it might have been included in error.
5. At the end of Mr Smith’s evidence, I offered him the opportunity to provide an explanation to the court before the end of the trial of how an appendix had come to be included as part of his report of which he claimed to have no knowledge. Mr Smith did not take up that opportunity, and I can therefore only infer that there is no explanation which exonerates Mr Smith of incompetence. On his showing in this case I do not consider that he is a fit person to act as an expert witness.
6. In conclusion, I can attach no credence at all to the figures put forward by the claimants and rubber-stamped by Mr Smith for the alleged cost of repairs.

EXPERTS

Issues relating to the problematic approach of experts to their task have been highlighted before, see Expert Evidence: the Expert’s Role: Seeing the Wood for the Trees.