PROVING THINGS 15: DAMAGES & EVIDENCE: GOING BACK TO COLLEGE

One harsh shock for many litigants occurs when they are asked to prove their damages at trial. We have looked several times when a litigant has come to grief at this stage, largely because there is no evidential support for the claims being made.  For that reason it is useful to look at cases where the trial judge has carried out a detailed analysis of a claim for damages.  The judgment of His Honour Judge Keyser QC in University of Wales -v- London College of  Business Limited [2016] EWHC 888 (QB) provides a detailed analysis of the principles of proving damages. It is also a working example of the problems that a party can cause for itself if the claim is not based on solid evidence and the approach that a judge will take if the evidence is sparse or questionable.  There is also an interesting observation on the practice of writing to a judge after a draft judgment has been received.

“Two matters of fundamental importance must be kept firmly in mind: first, the indemnity principle, which underlies the law’s approach to damages; second, the burden that lies on the claiming party… to prove its loss on the balance of probabilities.”

“… estimates advanced in the course of litigation in support of a claim for substantial damages cannot be accepted uncritically. “

“The time for adducing evidence is at trial… It is unacceptable to wait until I have produced a draft judgment and then seek to address its adverse findings by producing a further document that could and should have been produced in time for the trial. Draft judgments are not an opportunity for the parties to have a second bite of the cherry, whether by rearguing points or by plugging evidential gaps.”

KEY POINTS

  • The burden of proof in a loss of profits case remains on the party seeking damages.
  • The assumptions made in the claim for damages bore little resemblance to historic figures.
  • The historic figures were the safest starting point (although this had to be approached with caution).
  • It is not open to a party to seek to adduce new evidence, or make new submissions, once a draft judgment is sent out.

THE CASE

The defendant “the College” had been successful in establishing that the claimant “the University” had breached a contract to provide validation for students attending the College.  This action was  the trial of the counterclaim for damages.  The issues related to the number and type of students that the College would have attracted and the profit per student.

THE OMNISCIENT EXPERT

Many problems in litigation occur because experts can go beyond their ambit.

  1. Expert accountancy evidence was adduced by both parties: for the College, from Mr Christopher Makin, formerly a partner in a large firm of accountants and now in practice on his own account as an accountancy expert and civil mediator; for the University, from Mr Adam Smith, a partner in Deloitte Forensic within Deloitte LLP. Mr Makin and Mr Smith were able to reach a very large measure of agreement and, to that extent, this judgment will not adequately reflect the assistance they have provided. The issues between them at trial centred on a difference of approach: Mr Makin took the view that his experience did not qualify him to express expert opinions regarding the numbers of students that the College would have been likely to recruit, and he therefore very properly prescinded from any such opinions; whereas Mr Smith considered that, having experience of assessing the past performance and future strategies of businesses of varying kinds, he could, though not an expert in higher education, give expert opinions on the realism and feasibility of the College’s projections.

There were further issues with the experts called by the College as will be seen below.

THE BURDEN OF PROOF REMAINED ON THE COLLEGE

The judge rejected a submission that the circumstances of the breach meant that the College’s claim for damages should be viewed benevolently. The burden of proof remained on the party seeking to recover damages.
  1. Mr Simms submitted that, as the reason why the College cannot clearly demonstrate what would have happened if the Validation Agreement had not been suspended is the University’s breach of contract in suspending it, uncertainties ought to be resolved in the College’s favour by allowing it a “fair wind” in assessing the value of what it has lost and applying in its favour an evidential presumption giving it the benefit of any relevant doubt (cf. Browning v Brachers [2005] EWCA Civ 753, [2005] PNLR 44, at paragraph 74). Such a presumption appears to have originated in the case of the valuation of property (Armory v Delamirie (1721) 1 Strange 505), though it has also been considered capable of application in the case of loss of profits (e.g. Wilson v Northampton and Banbury Junction Railway Co (1874) 9 Ch App 279; and, with heavy qualification, Double G Communications Ltd v News Group International Ltd [2011] EWHC 961 (QB)).
  2. I have not found reference to this line of authority to be of any real assistance in the task before me. Two matters of fundamental importance must be kept firmly in mind: first, the indemnity principle, which underlies the law’s approach to damages; second, the burden that lies on the claiming party, here the College, to prove its loss on the balance of probabilities. The question must always, as it seems to me, be what inferences and conclusions are justified by the evidence. In some cases the defendant may have access to evidence that it has failed to produce, and it may be proper to draw an adverse inference as to the reasons why the evidence has not been produced; Armory v Delamirie, which involved the loss of physical property, was such a case. Another kind of case, of which Browning v Brachers is an example, concerns damages for the loss of intangible property, namely a right of action; where the negligent lawyer advanced the lost case at a certain value, it might be reasonable to infer against him that it did not have a significantly lesser value, in the absence of contrary evidence. The present case is simply a claim for loss of profits on account of breach of contract. Because the quantification exercise arises in consequence of the University’s breach of contract, the inherent uncertainties of the exercise may be said to result from the University’s conduct. But this is not a case of withholding or suppressing evidence or information and the University has not acted in a manner that imposes on it any burden to explain why a generous view ought not to be taken of the profits that the College would have made. It would be wrong to permit any supposed rule of law to override the two fundamental principles mentioned earlier in this paragraph. (See Zabihi v Janzemini [2009] EWCA Civ 851, at paragraphs 26 – 32 and 50 – 51.) Further, having considered the evidence before me, I should not consider a “fair wind” approach to be useful on the facts of this case. I find that my conclusion may be precisely expressed in the words of Hamblen J when he considered the same point in Porton Capital Technology Funds and others v 3M UK Holdings Ltd [2011] EWHC 2895 (Comm):
244. This is not a case concerning the value of goods which the defendant has failed to produce or of the suppression of evidence, as inArmory v Delamirie. Nor is it a case involving the loss of the chance of success in legal proceedings, as in Browning v Brachers. It is a claim for lost profits for breach of contract. There is factual and expert evidence before the court relating to that claim. There is documentation before the court relevant to the claim. The evidential playing field is a level one. Whilst it is correct that the claim involves a degree of conjecture, that is the case in relation to very many contractual damages claims and in all such cases it can be said that it is the defendant’s breach of contract which has made that conjecture necessary. As a matter of authority there is no requirement to apply the principle of Armory v Delamirie to a case such as the present, and as a matter of principle I consider that there is good reason not to do so and that the application of the principle should not be extended further than is necessary.

THIS TIME LAST YEAR WE WOULD HAVE BEEN MILLIONAIRES

The College put forward a case based upon the students it stated it would have attracted and the profits from each student.  However there was a marked contrast between past student numbers and the figures the College contended it would have achieved.
  1. These figures serve to emphasise the disjunction between the College’s claims as to what it would have achieved in the future and the reality of what it had achieved in the past. The College’s basic answer to this point was that its trading history did not form a useful indicator of its future prospects, because 2012 would have seen a material change in its business and a breakthrough in its trading results. The response was put clearly by Mr Makin in one of his replies to written questions: “The fundamental point … is that the defendant’s business would have been transformed by the circumstances which changed in 2012, such that it would have taken on an entirely different nature and scale.” Whether that response is well made will fall to be determined by a realistic appraisal of the evidence.
    1. Central to the College’s case on loss of profits is its estimate of the numbers of students that would have enrolled in April and September 2012:…
  1. Such estimates advanced in the course of litigation in support of a claim for substantial damages cannot be accepted uncritically. 

THE EXPERT AS ADVOCATE

The College called an expert. However the judge noted 

Professor Vass’s academic expertise does not lie in the field of the higher education market. Her qualifications are in psychology, with a component of economics, and her publications—none of them more recent than 2000—reflect those qualifications. She has not published or, as I understand it, carried out research in respect of the higher education market. (If she has ever carried out research, she has not done so recently.)…In my judgment there is force in Mr Capewell’s submission that Professor Vass’s evidence was “a product of her own anecdotal experience and her own interpretation of the open-access research of others” and that “her own personal experience was … of limited relevance given the issues in dispute.”
The judge considered that expert evidence in detail:
  1. Fifth, more generally, Professor Vass’s expressions of opinion lacked solid evidential underpinning but tended towards advocacy of the College’s case. This was rather highlighted by two pieces of evidence. One came at the end of her cross-examination, when she confirmed that her views of what was reasonable to expect in 2012 were based on the figures contained in the Validation Agreement; these figures would have been agreed after a process of “due diligence”, and student intake falling within the permitted figures should be accepted as reasonably likely to be achieved. In my view the use of that sort of reasoning betrays a lack of underlying substance in Professor Vass’s evidence. The other piece of evidence was her defence in cross-examination of the assertion in her report that there had been “a significant level of interest” in the College’s courses at a time when it had not commenced recruitment for the April 2012 intake. Professor Vass did not appear to know the actual figures for applications by the end of March 2012, but when informed of the figures she maintained that they supported her expressed view that the level of interest was “significant”. The reasons why I find that evidence unconvincing will appear from the discussion that follows.

TOO LATE TO PLUG GAPS IN THE EVIDENCE

There is an interesting observation in relation to the College’s attempt to plug gaps in the evidence.  During the trial the College produced evidence of a letter from the UKBA (UK Border Agency)
  1. I took the view that, despite the College’s failure to adduce evidence on this point in the course of the trial and the informal manner in which it belatedly sought to adduce such evidence, I could and should have regard to the further evidence contained in UKBA’s letter of 21 September 2012. However, I also took the view that the letter had to be considered strictly in the context of such other evidence as had been adduced in the case and that, in that context, it provided only limited assistance to the College’s case for the following reasons. The letter is retroactive, inasmuch as it provides an allocation with effect from an earlier date. But the Tier 4 licence had already been suspended when the interim allocations were issued in April 2012. There was no evidence to show that the College had been given an interim allocation at that date and there was good reason to suppose that, as it had previously had an interim nil allocation and had then had its licence suspended on 29 March 2012, it had not been given such an allocation. In the absence of other evidence, I accordingly considered myself justified in proceeding on the basis that the College did not receive a CAS allocation until 21 September 2012.
  2. On 18 April 2016 I sent to both parties a draft judgment that set out the substance of the reasoning in the last preceding paragraph. On the following day Mr Simms responded with an email that said that my assumptions as to CAS as at 31 August 2012 were “erroneous” and my conclusions “incorrect”. He relied on a letter dated 5 April 2012 from UKBA to the College. The material parts of the letter were as follows:
From 6th April 2012 we are continuing to limit the number of Tier 4 (General) CAS available to sponsors who do not hold highly trusted sponsor status and who have applied for but have yet to attain educational oversight with a UK Border Agency approved body.
You are subject to this limit because you have yet to attain educational oversight.
We have not applied the limit of 101 to your allocation now because your licence is currently suspended. If your licence status changes in the future, we will consider whether to apply the limit then.
On the basis of that letter, Mr Simms submitted in his email: “When the licence was reinstated the 101 limit operated immediately and automatically and was increased to 223 retrospectively on 21 September.”
  1. I have two comments on the letter of 5 April 2012. First, I do not regard it as admissible evidence. It is not open to the College to proceed in this manner. The time for adducing evidence is at trial. Although it was irregular for the College to respond to my earlier enquiry as to the evidence by producing, under cover of a letter sent by email, UKBA’s letter of 21 September 2012, I was, as I have indicated, prepared to accept the letter as late evidence. But anything the College sought to rely on with respect to the CAS allocation ought to have been produced then. It is unacceptable to wait until I have produced a draft judgment and then seek to address its adverse findings by producing a further document that could and should have been produced in time for the trial. Draft judgments are not an opportunity for the parties to have a second bite of the cherry, whether by rearguing points or by plugging evidential gaps.

ADDITIONAL COSTS

The judge went on to consider the  additional costs that each additional student would have given rise. To he considered the College’s case and observed
  1. As it was based on the College’s proposed figures for the 2012 intakes, the timetabling analysis is not directly relevant to the findings that I have made, but I shall express some views about it before considering an alternative approach. First, Mr Nisbet’s evidence is forensic; it is not grounded in facts as to the College’s conduct of its business but reflects an exercise undertaken to establish a putative level of profits. Second, Mr Nisbet’s evidence is neither useful factual evidence nor admissible opinion evidence. Third, the way in which the College puts its case is insufficiently supported by a factual basis.
  2. As to the first point, it seems to me that Mr Nisbet’s latest way of putting the College’s case is an example of the way in which he retrospectively sees the College’s position in 2012 as far better than it had seemed at the time or had ever been. This phenomenon has already become apparent in considering the intake numbers for students. The College’s proposed figures for incremental teaching costs have repeatedly been reduced in the course of these proceedings, and there is in my judgment much force in Mr Capewell’s complaint that “the efficiency in timetabling has been learnt in the course of the litigation process as the timetable has been continuously refined in order to reduce incremental costs as much as possible.”

NO OVERHEADS? LIFE IS NOT THAT SIMPLE

The judge observed:-

 “…it is common in loss of profit cases to find claimants contending that, although their profit margins were relatively small, the revenue lost on account of the defendant’s wrongdoing would have been almost pure profit because the overheads had been incurred. Life is rarely that simple”

CONCLUSION: HISTORIC DATE IS THE BEST STARTING POINT

The judge then had to deal with the issue of the factual basis upon which to assess teaching costs.

117.2 In the absence of any surer ground on which to proceed, I shall start from the historical data on teaching costs. But I bear in mind that historic costs are an imperfect guide to future costs and that the very significant fluctuation in the costs for the period 2009 to 2011 is unexplained. Simply by weighting an average over this period in favour of the more recent years, one can identify £1200 as a reasonable cost for each student per annum. I acknowledge that there is a degree of arbitrariness in this calculation, but it is quite impossible to proceed in a purely scientific manner, at least in the absence of reliable information as to the reasons for the variations from year to year.
117.3 I then have to consider how to take account of the point noted in the last preceding paragraph. Because of the low figures that I have allowed for intake, it is likely that the impact on variable costs will be lower than it would have been if the figures advanced by the College had been accepted. However, in view largely of the extreme way in which the College has advanced its case, it is very difficult for me to know how this would have played out in practice. The College bears the burden of proving its loss. But there is a clear difference between simple average costs per student and incremental costs per student. And it is probable that the College would have sought to accommodate the relatively low number of students in an economic and efficient manner: note, for example, the explicit reference in the later redaction of the Strategic Plan to the focus on “reduction of variable costs on all aspects”. Doing the best I can, I discount the average cost by one-half. This results in an average overall figure of £600 for each student per annum.
Conclusion
  1. The findings set out above will enable the parties to finalise the calculations necessary to quantify the damages on the counterclaim. I have mentioned that the manner of proceeding has meant that I do not know what the damages will be. If, as appears likely, the award will be modest, it will accord with the broader realities of the case, for reasons already explained.

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