The previous post in this series looked at the Court of Appeal decision in Bacciottini -v- Gotelee and Goldsmith [2016] EWCA Civ 170 where the court upheld an award of £250 in damages because of issues relating to mitigation of loss.  In LSREF f III Wight Ltd -v- Gateley LLP [2016] EWCA Civ 359.  It is a case  the Court of Appeal overturned a decision in relation to mitigation of loss. The trial judge held that the claimant had not acted unreasonably in failing to take steps to mitigate its loss and awarded damages of £240,000. The Court of Appeal held that steps could have been taken to mitigate the loss and varied the award to £157,100.

“In my judgment, none of the judge’s reasons, singularly or in the aggregate, justify the conclusion that the Claimant had not unreasonably failed to mitigate its loss. The offer was there, the benefit was double or treble the outlay, it has not been suggested that the Claimant lacked the funds with which to do the deal (even if it chose not to borrow them from Gateley) and the Claimant was a sophisticated investor in distressed assets about whom it could not possibly be said that such a deal would be outside the ordinary course of its business. I would, therefore, reverse the judge’s conclusion on this issue”


The defendant solicitor firm had been negligent in failing to draw to the claimant’s attention a clause in a lease. That clause meant that the lease was forfeited when the tenant suffered any one of a number of specified insolvency events.  This greatly reduced the value of the security and the lease.


The defendant argued that the claimant had failed to mitigate its loss by failing to negotiate a variation of the lease with the landlord. The landlord was prepared to negotiate a variation of the lease and remove the clause on payment of £150,000.  This would double, and possibly triple, the value of the lease.


The judge held that the claimant had suffered a loss at the date of the transaction.  The measure of loss was that sum which represented a diminution in the lease as security. This amounted to £240,000.


After obtaining judgment the claimants did, indeed, obtain a variation of the lease, and paid £150,000 for that variation. This fact was in evidence before the Court of Appeal.


The Court of Appeal held that the date for assessing a loss of this kind is usually best analysed using the trial date.

  1. Before turning to the judge’s reasons for concluding that the Claimant had not failed to mitigate its loss, I must briefly address Mr Stewart’s submissions about the law relating to mitigation. His main point, as I have already recorded in my summary, was that the question whether there has been a failure to mitigate in any particular case is a multifactorial question upon which an appellate court should be slow to interfere with the analysis of an experienced judge. He went so far as to submit it was really just a question of fact, relying on Sotiros Shipping Inc v Sameiet Solholt (the “Solholt”) [1983] 1 Lloyd’s Rep 605, Standard Chartered Bank v Pakistan National Shipping Corporation [2001] CLC 825 and Langsam v Beachcroft LLP [2012] EWCA Civ 1230.
  2. I readily accept that mitigation issues are heavily fact sensitive, multifactorial questions, upon which an appellate court will indeed be slow to interfere unless an experienced judge has gone clearly wrong, and it is beyond question that Judge Dight has a wealth of experience in property disputes. Nonetheless, the question at the end of the day is whether there has been an unreasonable failure to mitigate, and the application of a reasonableness test does, in the final analysis, require an objective analysis which requires something more than just fact-finding.
  3. Mr Stewart advanced a much more fundamental submission, namely that even if it might be said that the Claimant ought to have done a deal with Mr Owen, nonetheless as a matter of law the Claimant would not be obliged to credit Gateley for any consequential benefit. It would, in traditional language, be res inter alios acta or, in modern translation, “collateral”: see per Sales LJ in Swynson Ltd v Lowick Rose LLP [2015] EWCA Civ 629, at 53. He submitted that where the Claimant who faces a loss for which he is prima facie entitled to recover damages from the defendant, does something which brings him a benefit, he is not required to bring that into account against his damages claim unless the benefit can be said to have been caused by the defendant’s breach. For that purpose he relied upon the statement of the applicable principles by Popplewell J in Fulton Shipping Inc of Panama v Globalia Business Travel SAU of Spain [2014] EWHC 1547 (Comm), at paragraph 64, treated by this court as “helpful” on appeal in the same case at [2015] EWCA Civ 1299 and “illuminating” in the Swynson case per Longmore LJ at paragraph 17.
  4. Valuable though that analysis may be in comparable cases, I am mindful, as was Popplewell J, of the warning of Lord Wilberforce in Parry v Cleaver [1970] AC1, at 41H to 42B:
“As the learned justices in the High Court are careful to state, it is impossible to devise a principle so general as to be capable of covering the great variety of benefits from one source or another which may come to an injured man after, or because, he has met with an accident. Nor, as was said by Dixon C.J. in Espagne’s case (1961) 105 C.L.R. 569, is much assistance to be drawn from intuitive feelings as to what it is just that the wrongdoer should pay. Moreover, I regret that I cannot agree that it is easy to reason from one type of benefit to another. “
The present case is very far removed from the benefit under consideration in the Fulton case or, for that matter, in the Swynson case.
  1. Here, the damage to the Claimant consisted of an unusual provision in the Lease which, by 2014, constituted its only security for repayment, which could be completely cured by the payment of £150,000 (plus conveyancing costs) to the landlord Mr Owen. The benefit to be derived from such a payment precisely coincided with the damage caused by the breach, because it offered a complete cure for it.
  2. Mr Stewart submitted that the large passage of time between the occasion of the breach in 2007 and the potential for its cure in 2014 coupled with the fact that payment for a variation of the Lease was not part of the ordinary course of the Claimant’s business, meant that both the payment and the large benefit eventually derived from it in 2015 were for the Claimant’s account. In my judgment neither of those factors (nor any of the even less persuasive factors upon which Mr Stewart relied) come near to displacing the obvious and very close connection between the cost and benefit of varying the Lease and the damage caused to the Bank and later to the Claimant by taking the Lease in its unvaried form. Those factors were wholly insufficient for the transaction by which it was varied to be collateral, or res inter alios acta. That does not of itself answer the question whether the Claimant unreasonably failed to achieve a variation of the Lease by way of mitigation before trial. But it unquestionably amounted to mitigation, once undertaken, immediately after trial, and would have been mitigation if done before the trial.
  3. I turn therefore to address the judge’s seven reasons for concluding that the Claimant did not fail to mitigate the loss constituted by the presence of the insolvency forfeiture provision in the Lease. But I start by reminding myself that, on the judge’s analysis, payment of £150,000 plus costs would have improved the value of the security by almost £½m or almost £350,000 if the cost of the variation is netted off. On the Claimant’s own valuation at trial, the benefit was £340,000 or slightly less than £200,000 if the price of the variation is netted off. Mr Owen’s readiness to agree the variation at that price was, although no doubt not unlimited in time, still there at the time of trial, as events were to demonstrate.
  4. The judge’s first reason was that, as he put it, Mr Owen was an unknown quantity. There was no certainty that he would deal at the stated price, or at all, and he was in a strong negotiating position. While it is true that Mr Owen had made it clear that it could not be assumed that his offer would remain open for ever, it had been available, without alteration in amount, for several months by the time of the trial. It had not been withdrawn. The fact that Mr Owen might change his mind does not seem to me to be a reasonable ground for not seeking to pursue a negotiated variation of the Lease at the offered price. As far as I can ascertain, the real reason for the Claimant’s reluctance was its preference to obtain damages first, without pursuing a negotiation with Mr Owen, and without therefore having to give credit for the benefit of a successful outcome. Subsequent events demonstrate that, when the Claimant did pursue negotiation with Mr Owen, a deal at £150,000 rapidly ensued.
  5. Nor, as it seems to me, was Mr Owen in a particularly strong bargaining position. This appears to have been derived from the judge’s view that there were serious obstacles to the Claimant obtaining relief from forfeiture, were it to appoint receivers or administrators over MIL, on the ground that the appointment of receivers would have constituted a deliberate breach of the insolvency forfeiture provision: see paragraph 75 of the judgment. Notwithstanding Mr Stewart’s best efforts to explain, I have found that analysis difficult to understand. Neither the Claimant, nor the Bank was a party to the Lease, or bound by a covenant in it not to appoint receivers or administrators. Nor did the relevant provision contain a covenant by MIL not to enter into some insolvency process. It merely provided for a forfeiture (subject to the statutory right to seek relief) if such an event befell MIL. Since the forfeiture of a 199 year lease at a mere ground rent would generate an enormous windfall for the landlord, I can see no reason why the court should have refused relief from forfeiture on the application of the Claimant as mortgagee, although the judge was correct to say that relief in the form of a grant of a new lease would still have contained the offending clause. In my view, the £150,000 being offered by Mr Owen was a fair reflection of a far from impregnable bargaining position.
  6. The judge’s second reason was that, the burden being on Gateley to prove an unreasonable failure to mitigate, it had not called “evidence of sufficient quality to overcome that hurdle”. Again, I have found this difficult to understand. Gateley had demonstrated to the judge’s satisfaction that the benefit to be derived from a negotiated variation of the Lease for £150,000 was almost £½m. He had indeed preferred Gateley’s expert’s opinion, to that effect, over the Claimant’s evidence that the benefit was only £340,000. The evidence that Mr Owen had been prepared to accept £150,000, subject to contract, was apparent from the correspondence, and it seems difficult to imagine that Mr Owen could have been expected or persuaded to state his bargaining position orally, on oath, in the witness box.
  7. Thirdly, the judge drew attention to the fact that a variation of the Lease would require some form of participation by MIL itself. His instinctive reaction (with which I agree) was that, standing back, it would be unlikely that MIL could or would resist the variation at £150,000, but the judge was persuaded by counsel for the Claimant that there was no firm evidence to that effect.
  8. In my judgment, the evidence is tolerably plain. If the Claimant and Mr Owen were prepared to do a deal at £150,000, MIL’s assent as lessee could be obtained by the Claimant putting MIL into receivership or administration, under the protection of a side agreement with Mr Owen that he would not use that as a pretext for a forfeiture. We were told by counsel that this is, in fact, what later occurred, after trial. But even without that benefit of hindsight, the Claimant and Mr Owen between them held all the necessary cards. The Claimant certainly had, and Mr Owen claimed to have, a sufficient status as creditor of MIL to compel it to go along with an agreed variation of the Lease at £150,000, whether by the threat, or the actuality, of insolvency proceedings designed to take control of its affairs out of the hands of its directors.
  9. The judge’s fourth and fifth reasons were that, neither the terms of the Legal Charge nor the common law offered certainty that, if it paid £150,000 for a variation of the Lease, the Claimant could add that sum to the amount secured by the Legal Charge. Like the judge, we were treated to a detailed analysis of the terms of the Legal Charge. That question seems to me to be something of a red herring. By mid 2014, the Claimant was owed £785,000 odd under the terms of the loan facility, of which £653,820 was its then accumulated advance and cost of funds. The then value of its security subject to the insolvency forfeiture provision was only £340,000, so that it faced a shortfall in excess of £300,000 if it realised its security without first obtaining a variation of the Lease. Even if it could not add the £150,000 to the amount secured, the Claimant’s own valuation advice was that the variation would increase the value of the security to something between £670,000 and £795,000, amply sufficient to recover both its outstanding advance and cost of funds, and any surplus in value of the security above £650,000, up to £780,000 could be recovered because of its additional contractual entitlement to penalties and default interest. On any view therefore, and regardless whether it could add the £150,000 to its security, the Claimant stood to double its money by doing the deal with Mr Owen. On the judge’s own view as to the almost £½m benefit to be derived from the variation, the Claimant would have improved its position from a £340,000 recovery to a £785,000 recovery (a benefit of £445,000, at a cost of £150,000). In other words, it would have almost trebled its money.
  10. This analysis is also sufficient to deal with the judge’s sixth (and as he acknowledged) smaller point, namely that there might still be a significant shortfall on the account, if the Claimant was entitled to add the £150,000 to its security. That may be so, but in such an event, the Claimant would still have more than tripled its money by obtaining the variation from Mr Owen.
  11. The judge’s final point was that the scheme for obtaining a variation of the Lease proposed by Gateley was “complicated and potentially open-ended”. He said that the Bank was a lender and the Claimant an investor, and that both were entitled to regard the security as almost ready money, and should not be expected to undertake a risky and uncertain course, with contingent liabilities, and have to wait to see if those liabilities materialised, and then look to Gateley for an indemnity. If by that the judge meant that Gateley’s offer to settle the proceedings on the terms which I have summarised was not unreasonably refused, I have some sympathy with it. But the question is whether the Claimant unreasonably failed to attempt a £150,000 deal with Mr Owen in circumstances where, as later events have shown, that attempt would rapidly have led to success.
  12. In my judgment, none of the judge’s reasons, singularly or in the aggregate, justify the conclusion that the Claimant had not unreasonably failed to mitigate its loss. The offer was there, the benefit was double or treble the outlay, it has not been suggested that the Claimant lacked the funds with which to do the deal (even if it chose not to borrow them from Gateley) and the Claimant was a sophisticated investor in distressed assets about whom it could not possibly be said that such a deal would be outside the ordinary course of its business. I would, therefore, reverse the judge’s conclusion on this issue.
  13. What then are the consequences? Mr Pooles submitted that, on the judge’s valuation of the Property as at the trial date, mitigation by the obtaining of a variation of the Lease by that date would have ensured that the Claimant recovered the whole of its transactional loss (that is the outstanding advance and cost of funds of £653,820) so that it would in fact have suffered no recoverable loss, and fully recouped its cost of dealing with Mr Owen. If the judge had reached the opposite conclusion about mitigation in December 2014, then I think Mr Pooles must be right in that analysis. The Claimant’s loss would not have crystallised but, assessed as at the trial date, it would have held good marketable title to the Property, worth (on the judge’s estimation) £837,250, which would have been more than enough to recover both its transactional loss and £150,000 (plus conveyancing costs of the variation on top). If unable to add the cost of the variation of the Lease to the amount secured, then the headroom offered by MIL’s additional contractual indebtedness might have been insufficient to cover the whole of the £150,000 plus costs.
  14. However that may be, the judge did not in fact assess the Claimant’s loss at the trial date, both because he did not regard it as the appropriate date, and because he reached what in my judgment was the wrong conclusion on mitigation. Meanwhile the Claimant’s transactional loss remained uncrystallised.
  15. The parties have consented to this court being provided with sufficient uncontentious evidence about the continued progress of the Claimant’s loss towards crystallisation. It may not even now quite be crystallised due to the non-completion, as yet, of the auction sale of the Property. Nonetheless this court is much better placed than was the judge to calculate the Claimant’s transactional loss.
  16. In circumstances where the trial judge did not conduct an assessment of the Claimant’s transactional loss as at the trial date, it would in my judgment be wrong for this court now to carry out an artificial historical assessment as at that date, based purely on the judge’s findings about the then value of the security, if it would thereby blind itself to what it knows about relevant subsequent events. The auction sale has, if nothing else, established a market value for the Property at £645,000, well below the judge’s best estimate in December 2014. For reasons already explained, I do not consider that this can be attributed to a fall in property values during 2015. The Property was marketed with reasonable speed after the variation of the Lease at the end of January 2015, and I do not accept Mr Pooles’ last minute attempts to criticise the marketing process, for the purpose of trying to establish that the Claimant failed to achieve best value. At the most, it might be said that the Claimant should have mitigated its loss some five months sooner than it did, but there is no basis for any assumption that this delay caused a devaluation of the security in its hands.
  17. The proper course in my view is to assess the Claimant’s transactional loss now, on the basis of all the reliable information known to this court.
  18. The starting point is that the Claimant has now fully mitigated that part of its loss attributable to Gateley’s negligence, namely the diminution in the value of the security attributable to the presence of the insolvency forfeiture provision. That has, quite simply, been removed, so that any shortfall in recoveries now experienced on the sale of the Property is a risk which the Claimant undertook, and not a consequence of Gateley’s advice being wrong.
  19. Nonetheless, the question remains whether the Claimant should be entitled to its cost of mitigation together with interest from January 2015, when that cost was incurred. Mr Stewart submits that the cost is £150,000, £7,100 legal fees in connection with the variation, together with administration expenses and associated legal fees amounting to a further £47,500 already incurred, and a further £18,000 to be incurred by the conclusion of the administration of MIL.
  20. I would not include the administration expenses and associated legal fees as part of the Claimant’s cost of mitigating the loss caused by the defect in the security. True it is that to facilitate the variation of the Lease MIL was placed in administration, so that the administrators could execute the deed of variation on its behalf. But administration or some other insolvency process (such as receivership) at a similar cost would have been necessary in any event for the beneficial realisation of the security. It forms an undoubted part of the calculation of the Claimant’s transactional loss but not a part of its cost of fully rectifying the defect in its title to the security for which the Gateley is responsible.
  21. Calculations proffered by Mr Stewart during the hearing (with which Mr Pooles did not quarrel in detail) suggest that the Claimant’s total outlay, including the original advance, cost of funds, cost of and expenses of the variation, cost of administration and realisation of the security amounted to £908,025, against which the security may be assumed to be likely to realise £645,000, leaving a net transactional loss of £263,025. Put more narrowly, the Claimant’s advance plus cost of funds of £658,956 exceeds the assumed value of the Property, leaving nothing available for recouping its cost of mitigation.
  22. The result is, in my judgment, that there is nothing to displace the ordinary principle that a Claimant which reasonably mitigates its loss by incurring cost and expense in doing so may recover its cost of mitigation as damages.
  23. If my Lords agree, I would therefore allow the appeal, allow the cross appeal, and substitute for the judge’s award of damages an amount in the sum of £157,100 (being the price and associated legal costs of the variation of the Lease) together with interest thereon from 27 January 2015, at 2% per annum from that date (being the rate chosen by the judge).

Proving things