Salford City Council v Torkington & Anr

Where a contractual warranty concerning an income-producing business proves false, loss of profits may be recovered while the business trades. Once the innocent party, fully aware of the breach and its effects, reasonably ceases trading and disposes of the business, damages should ordinarily be assessed by valuation at that point. The valuation of the business as warranted, less its actual value, is the ceiling for that loss; a further claim for future trading profits is not available.

If post-closure future profits were recoverable, substantial uncertainties arising from third-party actions or external events would require a loss-of-a-chance assessment and an appropriate discount.

The council had given the defendants collateral contractual warranties concerning competition affecting a grocery and off-licence business conducted from leased premises. Competition contrary to those warranties caused the business to become unprofitable and to close in February 1988. Liability was established at an earlier trial and was not challenged on appeal.

On quantum, the High Court awarded losses on a continuing basis, including assumed future profits and the value of a notional sale in 1994. The council appealed. The central issue was whether loss after closure should be assessed as the value of the business at February/March 1988, or by a continuing assessment of future profits.

Appeal allowed unanimously. Potter LJ, with whom Mance and Wall LJJ agreed, held that the damages awarded under Bands 5 and 6 had to be assessed at February/March 1988, when the council’s breaches had rendered the business worthless.

1. The warranties concerned the degree of competition likely to be faced by a business acquired as an investment and operated commercially. It was within the parties’ reasonable contemplation that a false warranty might cause profits to be lost until the tenants ceased trading or sold the business. The appropriate cut-off point was therefore when, fully aware of the breach’s adverse effects, it was reasonable to cease trading and dispose of the business.

2. The ordinary contractual measure was the value of the benefit lost at that date. The actual business was worthless on closure. On the preferred expert valuation, its value had the warranties been true was £65,000. That sum was both the proper measure and the ceiling for the post-closure claim. Awarding continuing profits compensated the defendants for future trade which, from mid-1987, they had contemplated giving up.

3. Mance LJ added that an assessment at closure incorporated the business’s future potential and risks. With interest, it provided capital enabling the defendants to pursue an equivalent income-producing activity. It avoided a speculative reconstruction of trading and sale years after the business had ceased.

4. Potter LJ further held, alternatively, that if future loss had been recoverable, the judge should have applied the loss-of-a-chance approach in Allied Maples [1995] 1 WLR 1602. Where material uncertainty depends on third parties or events outside the claimant’s control, a probability finding alone is insufficient. A substantial discount would have been required.

5. The damages award was reduced from £181,111.26 to £103,318.25. Consequential interest and costs adjustments were left for agreement or further submissions.

• Court of Appeal (Civil Division): Allowed the council’s appeal and reduced the damages award.
• High Court, Manchester District Registry: HHJ Kershaw QC found the council liable for breach of collateral warranties. On quantum, judgment dated 1 March 2004 awarded the defendants £181,111.26 damages, plus interest.