EVIDENCE, DAMAGES AND A SOLICITOR’S GOODWILL

The Court of Appeal decision in Karim -v- Wemyss [2016] EWCA Civ 27 has already received some publicity, involving as it does litigation following the sale of a solicitor’s practice.  However the decision also shows the dangers of not bringing evidence to court to prove damages.

‘Plaintiffs must understand that if they bring actions for damages it is for them to prove their damage, it is not enough to write down the particulars, and, so to speak, throw themselves at the head of the court saying “This is what I have lost. I ask you to give me these damages”. They have to prove it.’

(Bonham Carter -v- Hyde Park Hotel [1948] WN, 92 Sol Jo 154, KBD).

KEY POINTS

  • A case had progressed to trial without all the necessary evidence to prove damages for a claim and counterclaim being placed before the trial judge.
  • It was for the claimant to prove a claim for damages, there was no burden on a defendant to prove a negative.
  • The claimant had failed to adduce any evidence to an entitlement over and above that set out in a sale agreement.
  • The defendant had not brought evidence to prove a specific sum for damages on the counterclaim.  This could be fatal to a claim for tortious damages. However the court was able to assess the appropriate damages for reduction in goodwill using the sale figures.
  • There was no evidence as to adequate rates in relation to loss of management time. However the Court of Appeal increased the rates allowed by the judge.

PRACTICE POINTS

  • This case highlights the issue of proving damages.
  • There must be evidence at court which not only proves, but also quantifies, any claim (or counterclaim) for damages.

THE CASE

  • The defendant (Mr Karim) purchased a solicitor’s practice from the claimant (Mr Wemyss). The sale price included  £100,000 for goodwill.
  • The claimant also agreed to pay the defendant the sums due for work on progress (WIP) on the date of sale, once those bills were paid.
  • The claimant brought an action against the defendant claiming for the work that was done for work in progress.
  • The defendant counterclaimed for damages for misrepresentation and breach of warranty.

THE EVIDENCE BEFORE THE TRIAL JUDGE

Lord Justice Lewison described the state of the evidence before the trial judge.

The progress of the action was beset by procedural errors and missed opportunities. Much potentially relevant evidence was not called. It finally came on for trial before HH Judge Cooke in the Mercantile Court. The trial began on 2 July 2013 but it overran twice and did not conclude until 7 November 2013. The judge gave a comprehensive judgment on 13 February 2014. His task was not helped by the way that the case was prepared and presented; and on many of the issues he had very little relevant evidence.”

THE EVIDENCE PROVING THE CLAIM

The claim did not start on a good footing. The claim for damages, as initially claimed, was “unintelligible”
“The claim
  1. I begin with the claim. The Particulars of Claim had annexed to them a spreadsheet which was said to justify Mr Wemyss’ claim. It was in my view unintelligible, not least because it did not identify what amounts represented work in progress or how they had been calculated. I do not think that Mr Dean, appearing for Mr Wemyss, suggested otherwise. Rather he relied on what he described as the master schedule which he himself prepared for the purposes of the trial. Mr Karim’s Defence on the other hand did contain a schedule which at least made some attempt to identify what had been paid by way of work in progress. But that did not explain what was in dispute or why. Mr Karim remedied that situation in a schedule served on 20 June 2013 (some 10 days before trial) which he verified by means of a witness statement made on 24 June 2013. “

EVIDENCE IN SUPPORT OF DAMAGES

The sale agreement provided for the claimant to recover WIP. The Court of Appeal held that the trial judge had misinterpreted the sale agreement and the claimant was confined to the WIP figure at the date of sale. In any event the judge had erred by awarding figures higher than the WIP figure when the claimant had adduced no evidence to justify them.

  1. The second point raises a question of fact. Mr Wemyss had put forward his claim and Mr Karim had disputed it. The schedule that he served on 20 June in effect asserted that there was no reason to alter the agreed WIP figures. On the judge’s interpretation of the SPA it would have been open to Mr Wemyss to explain why an alteration to the figure was justified, whether by reference to importance to the client, a mistake in calculating the number of billable hours achieved before completion, or otherwise. The judge held at [26] that it was for Mr Karim:
“to provide the evidence on which he relies if he disputes Mr Wemyss’s figures. This he has not done, save that he has stated certain amounts as being the value of time charged to the files after 1 April 2008 in cases where the eventual bill was less than the amount in the WIP schedule. I accept his evidence on that point…”.
  1. In my judgment it was for Mr Wemyss, as claimant, to establish his claim. Mr Karim was asserting a negative (i.e. that there was no justification for altering the WIP figures in the schedule). It is unrealistic to expect proof of a negative. The burden was, in my judgment, on Mr Wemyss to justify the change file by file. Mr Dean accepted that he did not do so; and indeed Mr Wemyss gave no evidence at all about Mr Karim’s schedule. I appreciate that the schedule was served after Mr Wemyss had served his witness statement, and so was not referred to in that statement. But the judge permitted oral examination in chief on new documents; and Mr Karim’s schedule was also put to Mr Wemyss in cross-examination. Thus he could also have been re-examined on it in detail, but he was not. There was a brief reference to the schedule in re-examination, but Mr Wemyss did not engage with its substance. Accordingly in my judgment the judge was wrong to have held that Mr Wemyss had established his claim, except to the extent that Mr Karim had admitted it. In effect he reversed the burden of proof.

EVIDENCE IN RELATION TO THE COUNTERCLAIM

The defendant counterclaimed on the basis that the turnover and profitability of the practice had been misrepresented.   There is a discussion of the difference between contractual and tortious damages.  However on the issue of evidence:

  1.  There was no evidence to prove that the misrepresentations led to a need to take out a loan (which had in fact been repaid in any event).
  2. The trial judge rejected the defendant’s claim for damages for loss of warranty on the grounds that no recoverable loss had been demonstrated.

The Court of Appeal held that the absence of evidence may well be a good ground for rejecting the case for damages in tort. However there was a co-existing claim in contract.  The defendant had not adduced any evidence of the losses or diminution in value of the business.

  1. It follows, therefore, that for each of the two possible mathematical calculations at least one essential element was missing. Does that mean that Mr Karim recovers nothing? It seems counter-intuitive that when the seller of a business negligently (or worse) inflates its profitability in order to induce a sale of the business and, for good measure warrants that the information is true, the buyer recovers nothing. It seems self-evident that a business with a profitability which is much less than that which has been represented and warranted is a less valuable business. I can see that in the case of the tortious measure of damages the lack of valuation evidence may present a problem because of the difficulty of knowing whether the buyer has made a good or bad bargain (although even that might be capable of being overcome). Does it follow that the same result applies to the contractual measure?
  2. Mr Quirke placed the warranty about turnover (rather than profit) at the forefront of his argument. I do not consider that the turnover is the relevant figure. What the buyer of a business ultimately pays for is profit, not turnover. Turnover is only a means to a profit, and the extent to which turnover represents profit will depend on the profit margin of the business in question. Mr Quirke argued that the LLP’s business had fixed costs, and that an increased turnover would feed directly into bottom line profit because the costs would not change. The difficulty with this argument is that the judge made no finding to that effect. Moreover, as a proposition it is not self-evidently correct. To take what is perhaps a trivial example: if increased turnover is generated by fee earners doing more work for clients, one would expect (at least) an increased expenditure on stationery, postage and telephone calls. I reject the argument based on turnover, and prefer to concentrate on profit.
  3. Mr Quirke relied on the principle that an award of damages is not precluded simply because of difficulties in assessment. The general principle is stated thus in Chitty on Contracts (32nd ed para 26-015):
“The fact that damages are difficult to assess does not disentitle the claimant to compensation for loss resulting from the defendant’s breach of contract. Where it is clear that the claimant has suffered substantial loss, but the evidence does not enable it to be precisely quantified, the court will assess damages as best it can on the available evidence. The fact that the amount of that loss cannot be precisely ascertained does not deprive the claimant of a remedy.”
  1. In Simpson v The London and North Western Railway Co (1876) 1 QBD 274 the plaintiff entrusted certain sample goods for delivery by the railway company to Newcastle to be delivered in time for a cattle show. The goods were not delivered in time and the plaintiff claimed damages for loss of use of the goods and the profit that he would have made by exhibiting and selling them at the show. The question for the court was whether those heads of damage were recoverable. One of the points taken was that an award of damages would be speculative. Cockburn CJ said:
“As to the supposed impossibility of ascertaining the damages, I think there is no such impossibility; to some extent, no doubt, they must be matter of speculation, but that is no reason for not awarding any damages at all.”
  1. Field J said:
“Then, as to the difficulty of ascertaining the profits which the plaintiff can be considered to have lost, a sufficient answer is that it must be assumed that the plaintiff would make some profit. I may add that I think a larger sum might have been awarded.”
  1. In Crewe Services & Investment Corporation v Silk [1998] 2 EGLR 1 the landlord of an agricultural holding brought an action against its tenant for breach of repairing obligations. The tenancy was a continuing tenancy, and because of the security of tenure given to agricultural tenants its future duration was uncertain. The trial judge awarded damages by reference to the cost of repair, although there was no evidence that the landlord intended to carry out the repairs. This court held that that was not the correct measure: the correct measure for an action brought during the currency of the term was the diminution in value of the landlord’s reversion. But the problem was that no valuation evidence had been put before the court. Robert Walker LJ (with whom Lord Woolf MR and Millett LJ agreed) held that that was not fatal to the landlord’s claim. He said:
“I am, however, by no means sure that the judge needed evidence, beyond what was before him, for the simple proposition that a tenanted farm in a seriously bad state — and it must be remembered that the judge rejected Mr Silk’s case that the breaches were non-existent or trivial — is worth less than a tenanted farm where the tenant has complied with all his obligations. The judge said at the end of his second judgment that on the termination of the tenancy with the breaches remaining unremedied, “an intending purchaser would insist that due allowance from the purchase price be made for putting all these matters right”. By parity of reasoning a purchaser would expect some allowance if he was buying the freehold subject to a tenancy where there were continuing breaches. He would not be satisfied with the bland assurance that all would be put right before the end of the tenancy.
The true position is (as Millett LJ observed in the course of argument) that general damages are at large, and the judge must do the best he can, just as the jury would have had to do when civil actions were heard by juries.”
  1. In Tai Hing Cotton Mill Ltd v Kamsing Knitting Factory [1979] AC 91 a buyer brought an action for damages for breach of a contract for the sale of goods. The measure of damages was the difference between the contract price and the market value of the goods at the relevant date. The evidence called at trial was all directed to the market value of the goods at 31 July 1973. However, it was held that the correct date for the comparison was December 1973, about which there was no specific evidence. The sellers argued that in those circumstances the buyers were entitled to no more than nominal damages, but the Privy Council rejected that argument. Lord Keith said:
“It is apparent on any view that the buyers suffered substantial loss, though the material to enable it to be precisely quantified is lacking.
Other possible courses canvassed in the course of the argument were (a) to order a retrial of the case on the matter of damages, (b) to restore the figure of damages fixed by Briggs C.J., and (c) to fix a new figure on the basis that the market price of yarn declined steadily and constantly between September 1973 and January 1975, and that therefore the point which the decline had reached at the end of December 1973 is capable of ascertainment. Their Lordships are not disposed to order a new trial. Amendment of the pleadings would be required and the delay, trouble and expense which would be involved in further proceedings do not appear to their Lordships to be consonant with the due administration of justice. The problem about the figure of damages fixed by Briggs C.J. is that it was plainly arrived at upon a wrong basis, and that is now common ground between the parties. In the result, their Lordships have come to the conclusion that the ends of justice would best be served if they were to fix a new figure of damages as best they can upon the available evidence, such as it is.”
  1. It is perfectly true that the judge rejected the two specific heads of loss that Mr Karim advanced. However, the pleaded Schedule of Loss also contained a claim for the reduction in value of the business as an alternative (put at £75,000). I do not think that the judge gave serious consideration to the question whether, even though the specific heads of loss had not been proved, there was nevertheless a more general loss for which Mr Karim was entitled to be compensated.
  2. It seems to me to be self-evident that a person who buys a business with a warranted profit earning capacity of £120,000 suffers a substantial loss if the business in fact has a profit earning capacity of only £92,000. But how can the loss be measured? The profit earning capacity of a business is most usually reflected in its goodwill. As Swanwick J pointed out in Doyle v Olby (Ironmongers) Ltd at 161 the value of goodwill is generally arrived at by applying a multiplier to the annual profit. We have the judge’s findings about the warranted profit and the actual profit. What we need is the appropriate multiplier. This could have been the subject of expert evidence but was not. What the experts would have given evidence about is what, in the market, buyers and sellers would have agreed as being the appropriate multiplier for a business like that of the LLP. But the best comparable would be the actual business itself. In this case we know from the SPA that the parties agreed the price of £100,000 for the goodwill, fixed assets, moveable assets, business intellectual property and IT system. Although the SPA envisaged an apportionment as between the various asset classes on completion, that was not done. But we know from the accounts and balance sheet of the LLP that as at 31 March 2008 it had fixed assets of £31,860. If we assume that the remainder of the purchase price is apportioned entirely to goodwill, the balance attributable to goodwill is £68,140. So Mr Karim was willing to pay, and Mr Wemyss was willing to accept, the sum of £68,140 as the price of warranted profit of £120,000. Although in most cases the price paid for goodwill is a multiple of profit, the unusual feature of this case is that the price paid was a fraction of profit. Applied to the warranted profitability that gives a divisor of 1.76. In my judgment we are entitled to (and should) assess damages for breach of the warranty about profitability by applying that divisor to the shortfall in profitability. That shortfall is £28,000. Applying the divisor of 1.76 that gives a difference in value of £15,909. Mr Dean argued that if we adopted this method we should discount the resulting sum to take account of uncertainties. I accept that submission to some extent, and I would round down the figure to £15,000. I would award that sum as damages for breach of warranty.

INCREASED INSURANCE PREMIUMS

The Court of Appeal refused to interfere with the trial judge’s findings that only £10,000 of increased premiums arose from misrepresentations made about claims history.

  1. If I may repeat something I have said before (see Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5, [2014] FSR 29 at [114]):
“Appellate courts have been repeatedly warned, by recent cases at the highest level, not to interfere with findings of fact by trial judges, unless compelled to do so. This applies not only to findings of primary fact, but also to the evaluation of those facts and to inferences to be drawn from them.”
  1. The judge in this case was immersed in the detail of the case for many days. He was much better able than we are to evaluate the whole course of the transaction and the relationship between these parties. He was also entitled to take into account the fact that Mr Balme’s statement was no more than hearsay, and that Mr Balme had not been called to give evidence so that his statement remained untested. In awarding an amount by way of damages he was also entitled to make allowances for uncertainties. We can only interfere with the judge’s finding if we are satisfied that it is “wrong”. Although I see the force of Mr Quirke’s criticisms I was not persuaded that the judge was wrong. I would dismiss this ground of appeal.
  2. Mr Quirke also argued that in addition to the direct additional cost of insurance there was also a consequential loss flowing from the unrevealed claims, and in particular a loss flowing from the publicity given to the penalty imposed upon Mr Wemyss by the SDT. The argument was that an internet search for the LLP would reveal that penalty and that the LLP’s reputation was damaged as a result. Mr Quirke accepted that there was no ready means of quantifying that loss, but asked us to do the best we could. The judge did not deal with his head of alleged loss at all. That is scarcely surprising, because although the point was inferentially pleaded it did not feature in the submissions made to the judge. I would decline to make any separate award under this head: the damage to the LLP is, in my judgment, adequately covered by the award I would make for breach of the profit warranty.

THE AWARD FOR LOSS OF MANAGEMENT TIME

The judge awarded management time incurred by the defendant at the rate of £30 an hour. The defendant argued it should be higher. Again there was an absence of evidence.

  1. I agree with Mr Quirke that the amount recoverable under clause 5.5 of the SPA is not concerned with the cost to the LLP of the management time in question. For one thing, the claim is not made by the LLP but by Mr Karim personally as the buyer under the SPA. For another clause 5.5 expressly entitles him to “a reasonable amount” for management time. Accordingly it seems to me that the judge’s concentration on the cost of employing Mr Rafik Karim and the absence of evidence that fee earners were prevented from doing other work was wide of the mark: compareNationwide BS v Dunlop Haywards (DHL) Ltd [2010] EWHC 254 (Comm), [2010] 1 WLR 258. As Mr Quirke pointed out, Mr Karim would still have a claim for management time even if it had all been spent in the evenings or at weekends when he would not in any event have been engaged on fee earning work. In my judgment by concentrating too much on the direct salary cost and loss to the LLP the judge underestimated the value of the claim. The value of an employee’s time to an employer must, after all, be worth more than the employee’s salary, otherwise there would be no point in employing him. Moreover a claim of this kind must also take into account the costs of internal overheads: Nationwide BS v Dunlop Haywards (DHL) Ltd at [18].
  2. There is of course the difficulty that the judge had no evidence from either side about an appropriate rate other than a charge out rate; and nor do we. But I am bound to say that on reading this part of the judge’s judgment I was surprised at how low the award was under this head. I do not think that he can have included anything for overhead costs even if cost was the correct measure. I have little more reliable material to go on than the judge did; but I would increase his award under this head to £60 per hour. Applied to the judge’s finding of 60 hours of time, this result in an award of £3,600 in place of the judge’s award of £1,800; an increase of £1,800.

RELATED POSTS

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: