Insurers seeking to recover from defendants sums paid to claimants – Claimants seeking to recover uninsured sum

Brit Inns Ltd (in liquidation) and others v BDW Trading Ltd and another company; Barber and others v BDW Trading Ltd and another company: Queen's Bench Division, Technology and Construction Court (Mr Justice Coulson): 31 July 2012

In July 2006, the first claimant company (the company) directed by the second and third claimants engaged the first defendant to demolish an existing pub and construct a bar, restaurant (the restaurant) and flats. By 10 December 2006, the fit-out works were largely completed. Between 10 and 11 December 2006, the basement was flooded due to the negligence of a third party (the first flood). On 15 January, there was a second flood (the second flood), which arose out of admittedly defective work carried out by the first defendant and/or their subcontractors, the second defendant, requiring the reinstatement of the fit-out works.

In 2008, the company had recovered £665,000 from its insurers (the insurers) for the second flood, including £355,070 for the claim of material damage and £240,905 for the claim for loss of profit. In December 2010, the company was put into liquidation. The company's insurers commenced a subrogated claim against the defendants, seeking to recover the sums that they had paid out to the company consequential on the second flood. The second and third claimants and the company’s liquidator commenced proceedings against the defendants for their uninsured and other claims as assignees of the company.

At trial, the company's insurance adjuster admitted that there were items and invoices which he had accepted but which should not have been paid. The defendants’ expert quantity surveyor (the defendants’ expert) contended that the correct approach to the assessment of material damage was to re-measure required elements of the claim to arrive at a reasonable figure. The parties had agreed that £47,654.89 would be included in the claim for material damage. In a joint statement, the parties had agreed that £127,005.87 ought to be rejected from the claim of material damages.

However, the claimants’ expert subsequently sought to argue that £28,336.72 ought to be reinstated. The claimants sought to recover the loss of profit for a 20-month period. Their accountant (the accountant), in assessing loss of profits, had assumed that: (i) the restaurant business would have been immediately profitable; (ii) all of the loss of profit was referable back to the second flood; and (iii) the figures underpinning the claim from a completely different business in another location were an appropriate comparison. The claimants’ sought the costs of other claims including, inter alia, the wasted costs of employing staff for the restaurant opening in 2006, who had to be let go because that was cheaper than retaining them until the restaurant finally reopened.

The principle issues for determination were: (i) the proper approach to the assessment to the material damage claim; (ii) the quantum of the material damage; (iii) the quantum of the loss of profit claim; and (iv) the quantum of other claims. The court ruled: (1) It was settled law that, if remedial works had been carried out, that would not in principle affect the assessment although, where the works had been completed by the time of the trial, the actual costs would almost always be the starting point of any assessment of the reasonable costs of reinstatement. Further, where the scope of the works and their costs had been the subject of scrutiny by a third party with a clear incentive to ensure that the sums paid had been kept to a minimum, the court would be likely to attach significant weight to the reasonableness of the sums paid out (see [54], [56] of the judgment).

In the instant case, the claim for the costs of the reinstatement fit-out works had been wholly exaggerated. The fact that the works had been carried out and sums paid out by the insurer to the company would not be decisive of the issue of reasonable cost, but it would be of some evidential weight. The sheer scale and range of the problems with the claim as submitted to the insurer had meant that it would generally be quite impossible to accept the invoices, without more, to support the claim. The retrospective valuations of the defendants’ expert would be preferred. A retrospective valuation of what had been done, and the application of standard rates and process to that work, would form the best way of arriving at a reasonable figure for the disputed element of work. However, depending on the facts, the invoiced sum might, on analysis, constitute the appropriate figure for assessment purposes (see [77], [92], [93] of the judgment).

(2) In addition to the £47,654.89 that the parties had agreed would be included in the claim for material damage, a further sum of £89,034 would be included to cover: carpentry; electricians; painters; plasterers; plumbing; the clerk of works; tiling; and manhole and related works. The experts had been right in excluding the items to the value of £127,005.87. They had never been properly recoverable against the defendants because of the agreement in the joint statement and the claimants’ expert had been wrong to attempt to open them up again (see [96], [164], [170], [187] of the judgment). The sum of £136,688.89 would be allowed for material damage (see [189] of the judgment).

(3) The accountant’s approach would not be accepted. There would be no good reason not to calculate the loss of profit claim by reference to the actual figures generated by the claimants when the restaurant went into business in October 2007. The experts had agreed that the figures demonstrated that the basement restaurant would not have made a significant profit. The modest sum of £20,779 had been identified as the net loss of profit over the seven-month period. In the absence of any evidence to suggest that the loss of profit during the relevant period had been caused by anything other than the second flood, the defendants would be liable for that amount (see [206], [262], [263] of the judgment).

(4) The only further head of claim with respect to the other claims to be allowed would be that relating to wasted staff costs. The staff engaged for November 2006 to February 2007 had been engaged because, but for the second flood, the claimants had been preparing to open in mid-December. The first flood had not been a separate cause of that loss because, given the damage that it had caused had been much less and the remedial period much shorter, it had not been likely that staff would have had to be let go prior to the anticipated reopening in March 2007.

That was except for one employee because it had not been established he had been on the payroll at the time of the second flood (see [223], [290], [295] of the judgment). The further sum of £16,403.24 would be allowed in respect of wasted staff costs (see [295] of the judgment).

Thomas Plewman (instructed by Norton Rose LLP) for the company; William Evans (instructed by Davenport Lyons) for the second and third claimants and the liquidator; Andrew Miller (instructed by Kennedys Law LLP) for the defendants.