PROVING THINGS 186: WHEN THE ONE WITNESS IN THE CASE HAD LITTLE KNOWLEDGE OF HOW THE FIGURES IN THE SCHEDULE HAD BEEN REACHED – THERE IS TROUBLE AHEAD…

In Crazy Bear Group Ltd v Patel & Anor [2020] EWHC 3023 (Ch) Insolvency and Companies Court Judge Jones (sitting as a Judge of the High Court) considered whether defendants in an action had proven that they had suffered damages as a result of a trespass.  This is another case where the evidence in support of a claim for damages fell woefully short of the necessary standard. It is a particular feature of the case that the claimants had no real knowledge of the schedule of damages put forward.

“… despite his statement that the Schedule of Loss and Annexures were true and that he could not afford an expert, it became clear not only that this document had been prepared by his son and the partnership’s accountant but that he had little knowledge of how the figures proposed had been reached. Yet he was the only witness.”

THE CASE

The defendants in the action were entitled to damages because the claimant had trespassed on their land (using a cellar) and on the basis that undertakings obtained by the claimant led them to suffer loss.  The issues related to a delay the defendants suffered in expanding the defendants’ shop premises and the delayed ability to rent out a flat that would have been available.

(WEBINAR ON PROVING DAMAGES

This case illustrates the manifold pitfalls of proving damages when a small business attempts to prove it has suffered loss.

On the 4th December 2020 I am looking at this is a lot more detail  in the particular context of personal injury actions, and presenting a webinar “Claims for loss of earnings: the self-employed, the sportsperson and the entertainer”.  This deals with the legal principles, and cases, where an injured claimant is self-employed or has an uncertain career path, typical of those involved in sports and entertainment.

This webinar looks at the particular difficulties of acting for self-employed people who suffer loss of earnings due to injury, focussing on:

• The particular problems of the self-employed claimant
• The injured business owner
• The effect of a limited company
• Calculating net loss
• Pension losses and the self-employed claimant

The webinar then goes on to look at particular issues relating to claiming losses in cases where the injured claimant earns, or hopes to earn, a living through sports and entertainment,  looking at cases where damages have been awarded and when a claim for “loss of chance” has been found to be appropriate.

Those attending the webinar will also be sent a set of useful links to relevant cases and articles on this topic together with a helpful “loss of earnings” questionnaire.

Booking details are available here. )

THE JUDGMENT ON DAMAGES

Returning to the Crazy Bear case, the judge held that the defendants’ evidence to support their losses was both inadequate and contradictory. Despite the courts indicating that a liberal view could be taken in relation to the assessment – no damages were awarded.

1. 1. Unfortunately, Mr Patel was not a good witness. His credibility suffered from the beginning because of his defence that the works begun on 8 October 2018 were only exploratory and deteriorated further during the trial because of the Compliance Explanation. For reasons which will appear further within my findings of fact, that defence and explanation are plainly untrue. Indeed, Mr Patel accepted during cross-examination, as he had to do when the evidence was presented to him by Ms Read, that the 8 October 2018 works were the beginning of the performance of a contract to complete the whole of Phase 1 and Phase 2, starting with the extension and a week later with Phase 2’s works to the shop and flat. In addition, there is the problem, as mentioned above, that he did not disclose that the Phase 1 Planning Conditions had not been met when work started on 8 October 2018 under a contract for the Phase 1 works to be completed. There is also the late disclosure of the building contract.

   2. The troubling features of his evidence do not end there. I will not list every matter but draw attention to three further points in the context of the loss of profits being claimed:

a) First, despite his statement that the Schedule of Loss and Annexures were true and that he could not afford an expert, it became clear not only that this document had been prepared by his son and the partnership’s accountant but that he had little knowledge of how the figures proposed had been reached. Yet he was the only witness.

b) Second, when Ms Read took him to figures for the future cost of employees and put to him that they did not include the wages for additional employees needed because of the increase in turnover, his answer was that the figures were for those wages because his son’s wage was excluded on the basis that he is a partner. The problems with this are both that he did not know how the figures were compiled and that his son is still not a partner. It is true Mr Patel said at the beginning of his evidence that his son is now a partner but he retracted that evidence having later referred to his son still receiving a wage. Mr Patel subsequently accepted that his son was not yet a partner but will become an equity partner at some time in the future. His son remains an employee paid a wage. The reference to three parties in Annexure 3 is also noted in this context (see paragraph 26(b) above).

c) Third, the claim for loss of rental from the flat was based upon it being a 2-bedroom flat and valuation evidence of loss of rental from a 2-bedroom let was presented. Yet, the planning permission was for a 1 bedroom flat. That is a poor reflection upon his credibility. His purported explanation that as a retailer for the last 20 years he knew the rental would be the same because the size of the flat was the same smacks of a witness willing to say anything for the benefit of their own case. That is of particular concern when it arises for the purpose of obtaining financial benefit through an award of damages.

1. None of that necessarily leads to the conclusion that all his evidence will be unreliable. It means that it must be approached with caution taking into consideration the finding of unreliability in respect of the matters referred to above.

1. 1. The decision to be made, therefore, is whether in all those circumstances Mr and Mrs Patel have satisfied the burden of establishing causation by Mr Patel stating in cross-examination that Phase 2 stopped because of the expense of this litigation when: (a) there is evidence of significant litigation costs to support the belated evidence of Mr Patel; but (b) the belated presentation of this new reason for termination of Phase 2 means it could not be properly tested; (c) there are many reasons to doubt this evidence without it having been tested; and (d) caution must be exercised when addressing Mr Patel’s evidence because of his unreliability when dealing with other important aspects of the claim.

   2. Reliance on the litigation produces the third potential problem. Namely, whether it can be established that the Basement Trespass was a causative link when the litigation relied upon by Mr Patel to explain why Phase 2 stopped concerns many other issues. Mr and Mrs Patel need to establish a real and substantial chance that the Phase 2 work would not have been stopped in any event because of the cost of the litigation still dealing (in the absence of the Basement Trespass) with: (i) the claim for a final injunction to restrain Phase 1 for non-compliance with Phase 1 Planning Conditions and/or the Act; and (ii) the issues over the use of the right of way; and/or (iii the other trespass claims.

   3. The fourth potential problem assumes causation is established and concerns quantification. Mr and Mrs Patel assert that once Phase 1 and Phase 2 were completed, they would have increased turnover by the sale of additional goods, from the sub-post office franchise and from the flat’s rental. That being so, one would expect to see, at least as a guide to explain the projections, evidence of: (i) the intended use of the additional selling areas within the shop identifying the bases for the belief that the additional products, as described, would sell and their gross margins; (ii) a description of the sub-post office services to be provided and the bases for the belief that the sales projected and the resulting gross profit margins would be achieved; (iii) allowance for the loss of turnover from the previous sale of goods in the area now being used by the sub-post office; (iv) an explanation of the type of additional expenses which would have resulted from the increased business (from loan repayments to wages etcetera) and for their quantification; (v) evidence of market rental for the 1 bedroom flat and of the likely letting periods during a financial year (obviously depending upon the type of tenancy); and (vi) the effect of tax upon the additional profits.

   4. Obviously, it may not be practical or necessary to provide all that evidence/information and the list may be improved. However, the point is that Mr and Mrs Patel’s evidence does not explain the projected figures to the extent required. The projections are unreliable for all the reasons appearing within paragraphs 68-73 above. In addition, Mr Patel’s attempt to mislead CBG and the court in respect of the loss of rental for a 2-bedroom flat in particular demonstrates and supports not only the need for caution when considering his evidence but that his evidence of projected loss cannot be accepted in the light of all those reasons.

   5. Ms Read submits that this means the claim should be dismissed and relies upon the judgment of Lady Justice Arden in Ramzan v Brookwide Ltd (above) at [31-32] (see paragraph 81 above). However, the judgment emphasises that the Court should do its best to reach an assessment which will evaluate the chance that those profits would have been made. A liberal approach is to be adopted. There is other information available potentially to do that. Namely the partnership accounts and the fact that completion of Phase 1 and 2 would have resulted in new facilities and services offering the chance of increased turnover and net profit. The assessment would have to be extremely conservative because of the lack of reliable evidence but rejection of Mr and Mrs Patel’s projections does not necessarily mean an assessment should not be made if it can produce a bottom-line figure.

   6. A starting point would be the net profits before tax for the financial year ending 31 March 2018. An “educated” estimate based on the nature of the plans for the business would be an increase in net pre-tax profit in the first year of between, say 10-15% and in the second year of between, say 15-20%. There would need to be a loss of chance discount of between, say 25 and 33%. All plans carry risk and an investment of £100,000 will not automatically lead to increased profit. Using a previous net pre-tax profit of £60,000 this would lead to an award over two years of some £21,000 at rates of 15 and 20% but be subject to a deduction of 25% for loss of chance. Consideration could then be given to increasing the resulting figure because of the reduced profits of subsequent years when compared with those for the 2018 financial year end, albeit excluding the costs of litigation. There would then be the issue of tax.

   7. However, it must be recognised that this would be only the starting point. There are other matters to consider and any such assessment will be fraught with difficulty. It is all very well looking at existing turnover and adopting a broad-brush figure for increased net profit based upon the fact that the store is larger and includes a sub-post office but there is no guidance to assist in assessing most, if not all, of the matters referred to in paragraph 104 above. In addition, there would be the issue as to when Mr and Mrs Patel would have been able to carry out Phase 1 and complete Phase 2 but for the Building Trespass. They would need to have complied with the Phase 1 Planning Conditions and with section 6 of the Act. They would need to have restarted Phase 2. None of this is addressed (at least not properly) in their evidence.

   8. Further, the failure to address the decision to stop Phase 2 also raises problems for the issue of mitigation. In addition, there would also be the claim for loss of rent and the issue whether it should be rejected in the context of the misrepresentation that there would be a 2-bedroom flat. If it were necessary to decide this, I would conclude that Mr and Mrs Patel have failed to provide evidence of loss of rental based upon the letting of a 1 bedroom flat. They chose to present evidence of an alternative 2 bedroom letting, which would not have occurred. That evidence must be rejected and Mr Patel’s proposal that he can provide evidence during cross-examination based upon his experience in retail is unacceptable. In addition, the doctrine of “clean hands” would apply when Mr and Mrs Patel have sought to lead the court to an award of compensation based upon a false fact.

   9. All those matters affecting quantification mean that the underlying point of Ms Read’s submission, namely that there cannot be a fair assessment, will remain to be addressed if causation is established.

L) The Decision

1. 1. I have reached the following decisions taking into consideration the findings of fact, the matters and reasons set out above. For convenience I will start from the beginning even though that repeats decisions already made above.

   2. The starting point is, as decided above, that CBG has established that the works required for Phase 1 and Phase 2 were started by Mr and Mrs Patel’s builders under contract on 8 October 2018. This was a breach of the Phase 1 Planning Conditions and the Act. Therefore, the Phase 1 works should not have been started that day. CBG, having received the letter dated 4 October 2018, which with its enclosures gave notice that Phase 1 and Phase 2 would start, was entitled to begin its claim for a final injunction based upon non-compliance with the Act. They would have been entitled to also rely upon breach of the Phase 1 Planning Conditions had that been disclosed by Mr and Mrs Patel (see the facts at paragraphs 45-55 and paragraph 85 above).

   3. In those circumstances, as also decided above, the claim that the Patel Undertaking resulted in the consequential loss must fail. CBG remained entitled to claim its final injunction because the Phase 1 Planning Conditions were not met until March 2020 and no notice has been served under section 6 of the Act. The reasons set out in paragraphs 85-86 above apply and need not be repeated.

   4. The claim for consequential loss must depend, therefore, upon the claim for damages resulting from the Basement Trespass. However, as decided above, the Basement Trespass cannot have caused any consequential loss resulting from the stoppage of the 8 October 2018 work when there should never have been any work to stop in the first place without prior compliance with the Phase 1 Planning Conditions and section 6 of the Act (see paragraphs 48-55 and 87-88 above). It also follows that there can be no claim for consequential loss resulting from the Basement Trespass in respect of any of the steps taken in preparation of the works before 8 October 2012. The reasons set out in paragraph 89 above apply.

   5. Potentially, however, as explained at paragraphs 90-91 above, there can be a claim for consequential loss as a result of events after 8 October 2018 if discovery of the Basement Trespass led to the breaking of the chain of causation between non-compliance with the Phase 1 Planning Conditions and the Act and their inability to carry out Phase 1. This may be because of compliance with the requirements of the Phase 1 Planning Conditions and section 6 of the Act or because the Basement Trespass prevented compliance (see paragraphs 90-91 above).

   6. However, their evidence does not really address that issue. Their evidence does not proceed from the premise that the work should not have started in any event. It does not address in that context whether Phase 1 would have started at or around a particular date or period after 8 October 2018 but for the Basement Trespass. There is no evidence from Mr and Mrs Patel to establish the above-mentioned break in the chain of causation either from the facts that occurred or applying a real and substantial chance test. They have not established that the Basement Trespass caused the consequential loss claimed (see paragraphs 92-94 above).

   7. In any event, their decision to stop the Phase 2 work in late November 2018 was also highly material. There would be no alteration to their business as planned without Phase 2. No consequential loss could have resulted from the Basement Trespass if it was not the cause of the decision to stop Phase 2.

   8. Mr and Mrs Patel’s evidence does not address the circumstances and reasons for that decision. Pre-trial, it was asserted in Annexure 2 to the Schedule of Loss that the stoppage was caused by the injunction. That is wrong in fact. Neither the interim injunction nor the Patel Undertaking prohibited Phase 2. They changed their case at trial with Mr Patel’s statement during cross-examination, for the first time and without any particulars, that it was attributable to the cost of this litigation (see paragraphs 95-97 above). However, this belated alternative explanation was presented without detail and it produces too many issues which they have not addressed in their evidence (see paragraph 97 above). Those issues are derived from the findings of fact at paragraphs 59-67 above.

   9. I will also take into consideration that this belated assertion by Mr Patel that the decision to stop Phase 2 because of the cost of litigation does not appear on its face to make sense (see paragraphs 98-100 above). In addition, not only does their evidence not address this (at least not adequately), it does not consider the possibility that Phase 2 could have been completed and the “new” business started without Phase 1. This is a matter of causation and of mitigation, if causation is established (see paragraphs 109 above).

   10. The matters at paragraphs 118-119 above counter and outweigh the limited evidence which can be identified to support Mr Patel’s oral evidence that Phase 2 stopped because of the cost of this litigation. It can be inferred from the quantum of the profits made by the partnership before November 2018, in particular for the financial year end 31 May 2018 and the quantum of the legal expenses incurred during the financial year end 31 May 2019 that it will have been difficult to finance the litigation (see paragraph 102 above). However, that is insufficient evidence. I reject Mr Patel’s evidence. First because of the circumstances in which the new explanation was advanced. Second because of the lack of evidence in support. Third because of all the factors which weigh against his evidence. Finally, because of his overall lack of reliability as a witness.

   11. Even if I had accepted Mr Patel’s explanation for the decision, I would not have accepted there was a real or substantial chance that the Phase 2 work would have continued but for the Basement Trespass (see paragraph 103 above). That conclusion is reached by asking what would have happened without the Basement Trespass. The parties would still have been litigating over whether Phase 1 was permitted, whether there had been an infringement of the right of way, whether there was trespass on the “green land” by Mr and Mrs Patel and whether their claim of trespass against CBG would succeed. I have heard no evidence to suggest that those claims would not have been pursued had there been no Basement Trespass. There is no evidence to suggest a real or substantial chance that the cost of litigation would have been reduced to an extent that would have altered Mr and Mrs Patel’s decision to stop Phase 2 had the Basement Trespass not existed and, therefore, not been litigated.

   12. The consequential loss claimed by Mr and Mrs Patel results first from their non-compliance with the Phase 1 Planning Conditions and the Act and then from their decision to stop the Phase 2 works. The planned, new business could not exist without Phase 2. In my judgment Mr and Mrs Patel have not established that their decision to stop Phase 2 was caused by the Basement Trespass whether as a matter of fact on the balance of probability or as a real and substantial chance (see paragraph 91 above). No causative link to the Basement Trespass has been established either for the periods before or after 8 October 2018.

   13. In all those circumstances I need not decide whether to award compensation in accordance with paragraphs 104-110 above. Any award would have had to have been extremely broad brush for the reasons addressed and would have had to brush over many of the deficiencies of Mr and Mrs Patel’s evidence. A fair assessment would not have been possible on that evidence. This is illustrated by the issue of mitigation. Whilst it was not for Mr and Mrs Patel to prove the steps they took to mitigate their loss were reasonable, they have not dealt with the circumstances in which or the reasons why the decision to stop Phase 2 was taken. Nor have they presented evidence which addresses the financial consequences if they had not made that decision. A fair assessment could not have been made when those potentially important factors could not be the subject of submissions or determination.

M) Conclusion

1. The decisions above produce the conclusion that the claim for consequential loss fails. In many ways I reach that decision with regret because it is derived in part from Mr Patel’s lack of reliability and the failure of Mr and Mrs Patel to present the evidence required to address the issues. On the other hand, that was their choice and it was also their choice to proceed with the works on 8 October 2018 in the manner expressed within their letter dated 4 October 2018 when they should not have done so.

2. Returning to the introduction, the course that ought to have been taken would have been to explain to CBG at the time that the Phase 1 Planning Conditions needed to be fulfilled and that they would like to discuss Phase 1 and Phase 2 using the procedures required by the Act. This does not mean CBG should conclude that it behaved in a satisfactory manner. The Basement Trespass should not have occurred and its existence should also have been a matter for open discussion and resolution. Instead both neighbours became embroiled in dispute also involving other trespasses and rights of way and failed to act as neighbours should.