Red River UK Ltd & Anor v Sheikh & Anor

Loss of development profit following breach of contract requires proof, on the balance of probabilities, that the claimant would have obtained the necessary planning permission and finance and would have carried out the development. A development opportunity is too speculative where the evidence shows that finance would probably have been unavailable in the relevant market. Consequential expenditure is recoverable only where it was caused by the breach. Additional borrowing costs may be recoverable by comparing the charges actually incurred with the cost of replacement finance. Potential gains from an alternative transaction may constitute avoided loss, but the court may leave that question undecided where the principal claim already fails.

This was the second part of the High Court’s judgment in proceedings arising from the defendants’ breach of a settlement agreement. The first part, dealing with liability, was delivered as [2010] EWHC 961 (Ch). The remaining issues concerned causation and quantum.

The claimants sought damages for the loss of a proposed redevelopment of property after the defendants prevented refinancing with the Bank of Ireland. They also claimed additional interest and charges incurred with the Bank of Scotland and the cost of a valuation. The defendants advanced an amended counterclaim. The central questions were whether the redevelopment would probably have proceeded, what losses were caused by the breach, and whether the counterclaim had evidential support.

1. Loss of development profit. The claim for profit from redevelopment failed. The court accepted that planning permission for an enhanced 42-unit scheme would probably have been obtained by about April 2008. That did not establish that the development would have proceeded.
2. Red River had no substantial assets apart from the property and would have needed further finance after obtaining planning permission. The one-year land-banking facility would have been exhausted, and detailed funding discussions could not have begun before the spring or summer of 2008. The worsening credit market, the unsuccessful funding efforts, and the withdrawal of a potential lender showed that Red River would probably have been unable to obtain development finance, even if the initial refinancing had completed. The loss of profit claim therefore failed in its entirety.
3. The court made additional observations on quantum. Even if finance had been available, a substantial discount would have been required for contingencies. It was also arguable that the potential benefit under the later agreement with the Metropolitan Housing Trust represented an alternative means of realising the property’s development potential and should be treated as avoided loss. That issue was left undecided.
4. Other losses. Additional interest and charges payable to the Bank of Scotland were recoverable in principle. The proper measure was the difference between those charges from 8 October 2007 until payment and the interest payable on replacement finance. Quantification was directed to be dealt with by an inquiry before the Master.
5. The £3,000 valuation fee paid to Cluttons was not recoverable. The expenditure arose from the unsuccessful search for development finance, and the same difficulty would have existed without the breach. It was therefore not caused by the defendants’ breach.
6. The amended counterclaim was dismissed. The alleged fraudulent transaction and other claims, including economic duress, undue influence, illegality and inducement to breach, lacked evidential support.

This was a first-instance judgment. It formed the second part of the High Court’s decision, following the liability judgment delivered on 30 April 2010 in [2010] EWHC 961 (Ch). The two judgments were intended to be read together.