Beoco Ltd v Alfa Laval Co Ltd

Contract damages for lost profit are assessed in light of events known when damages are assessed. A claimant cannot recover hypothetical loss of production during repairs where a later, independent event means that the defective asset could not in fact have earned profit during that period.

The same principle applies in contract and tort. The recoverable loss remains the cost of making good the defect and any production loss actually caused by its repair.

A late amendment that fundamentally changes a claim will ordinarily entitle the defendant to costs up to the amendment, subject to special reasons. A claimant who fails against both defendants cannot ordinarily obtain a Bullock or Sanderson order merely because one defendant blamed the other.

A heat exchanger supplied under a direct contractual warranty contained latent design and workmanship defects. After a defective repair, the claimant's engineers returned it to service without appropriate testing. It exploded, causing extensive damage and production losses.

The Official Referee held that the first defendant had breached warranty, but that the claimant's conduct caused the explosion. He nevertheless allowed an alternative claim for the cost of remedying the original defects and hypothetical loss of production, and made a costs order favouring the claimant against the first defendant.

The first defendant appealed the amendment, the availability of hypothetical lost-profit damages and costs. The claimant cross-appealed concerning the second defendant's costs. The central question was whether lost production which would have accompanied repair of the defective equipment remained recoverable although the explosion meant that the repairs and consequent loss were never incurred.

1. Appeal allowed; cross-appeal dismissed. Stuart-Smith LJ gave the reasons, with which Peter Gibson LJ and Balcombe LJ agreed.

2. The judge was entitled to permit the late amendment. Amendments should generally be allowed so that all issues between the parties can be determined, unless any resulting prejudice cannot properly be compensated in costs. Refusing the amendment would also have prevented the claimant from pursuing its alternative claim in separate proceedings. The first defendant's insurance difficulty did not justify disturbing the discretionary decision.

3. The claimant could not recover hypothetical loss of production during the period in which the defective casing would have been repaired. Damages are assessed using events which have occurred by the assessment. The explosion meant that the heat exchanger was not a profit-earning asset during that period and the hypothetical repair could not cause a real detention from profitable use. The same principle governing this head of loss in tort applies to contractual damages.

4. The assessment was therefore limited to the cost of replacing the defective casing and any loss of production actually incurred on and after 24 August 1988 while the repair was being effected.

5. The costs order below was set aside. Where a late amendment substantially changes the case and, without it, the action would fail, the defendant will generally receive its costs to the amendment date unless special reasons justify another order. The first defendant could not realistically protect itself by a payment into court or an offer under Rules of the Supreme Court Order 22, rule 14 before it had proper particulars, disclosure and expert investigation of the new claim. It was awarded all costs to 24 February 1992 and 85 per cent thereafter.

6. No Bullock or Sanderson order was appropriate. The claimant had failed against both defendants on the claim concerning the explosion, and the second defendant had no part in the alternative claim.

• Court of Appeal: Allowed the first defendant's appeal, restricted the damages assessment, varied the costs order, and dismissed the claimant's cross-appeal.

• High Court, Official Referee: His Honour Judge Bowsher QC found breach of warranty by the first defendant but held that the claimant's conduct caused the explosion. He permitted an alternative claim for damages to be assessed and made a costs order favouring the claimant against the first defendant.