Scott Equipment Company v Russell Grant Ltd

In a contractual claim for loss of profits, the claimant must prove both the loss and its causation. Projected profits based on full use of equipment cannot be recovered where actual use sharply declined for reasons unconnected with the breach. A previous finding that loss was caused by breach does not justify projecting the same level of use into a later period after a material and unexplained change in the claimant’s conduct. A broad-brush or jury assessment cannot replace proof of loss and causation.

Clear contractual payment terms must be applied according to their wording. A sum not recoverable as damages because of limitation may nevertheless be set off against a different contractual sum, where the underlying claim has not been waived.

Scott Equipment Company v Russell Grant Ltd concerned the supply of a waste fish-drying plant. The Queen’s Bench Division, before Holland J, found that the plant failed to meet specification and awarded Russell Grant Ltd damages, including substantial loss-of-profit sums, in a judgment reported as (2004) EWHC (QB) 1229.

Permission to appeal was refused on liability issues but granted on three quantum issues. The Court of Appeal had to determine whether loss of profits could be projected through periods in 2003 and 2004 when the plant’s use had materially declined, whether the final contractual instalment of £50,000 was payable, and whether sums relating to earlier fires could be set off against that instalment.

Appeal allowed to the extent indicated. Waller LJ gave the leading judgment. Wall LJ agreed. Blackburne J agreed and added observations concerning the loss-of-profit claim after 30 March 2003.

1. Loss and causation. A claimant seeking contractual loss-of-profit damages bears the burden of establishing both the loss and its causal connection with the breach. The judge’s finding that the reduction in use and output during the later part of 2003 was not connected with Scotts’ breach was fatal to the claim for that period. The issue was causation, rather than simply whether Grants had mitigated its loss.
2. Later projections. The earlier findings that Grants would have used a compliant machine for 18 hours a day, six days a week, did not justify applying that assumption after the unexplained reduction in actual use. Grants failed to establish the loss for the relevant later weeks of 2003 and for the period claimed in 2004. The judge’s broad-brush jury solution for 2004 could not cure the absence of evidence proving what loss had been caused by the breach.
3. Final instalment. The contractual wording was clear. The final 10 per cent instalment was due 30 days after commissioning or 60 days after delivery, whichever was sooner. The judge was wrong to reject Scotts’ counterclaim on the basis that payment was conditional on the plant meeting specification.
4. Set-off and waiver. Although sums relating to fires before 1 June 2001 could not be recovered as damages because of the limitation position, they could be set off against the separate claim for £50,000. Grants had not waived those sums. The award was therefore reduced by the loss-of-profit sums for the affected periods and by the balance of the instalment after setting off £35,801.

Costs were to be determined following written submissions, unless an oral hearing was requested.

• Court of Appeal (Civil Division): In [2005] EWCA Civ 156, the appeal was allowed to the extent indicated. The loss-of-profit awards for the affected periods were removed, and the final instalment was treated as payable subject to the permitted set-off.
• Queen’s Bench Division: Holland J found Scotts liable for breach of contract and awarded Grants damages, including loss of profits, in (2004) EWHC (QB) 1229.