| Date | 3 June 1999 |
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| Judgment | John Harris Partnership -v- Groveworld Limited, TCC 3 March 1999 |
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| The Issue | Whether funding arrangements under a joint venture agreement will restrict the damages recoverable by a party to that agreement. |
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| Implication |
Where a claimant is entitled to reimbursement of its loss by a third party, that reimbursement is normally regarded as a irrelevant and not such as to lead to a reduction of the damages recoverable. |
printIt is a fundamental principle of the law relating to damages in both contract and tort that a party can only recover damages to replace loss that it has actually incurred. Consequently it has been a common ploy for defendants in certain situations to argue that damages claimed against them have not actually been incurred by the claimant and accordingly are not recoverable. An example would be where the claimant was a developer claiming damages from a builder or a member of its professional team. Where that developer was fully indemnified by its funders against any losses incurred on the project, the builders or professionals might argue in their defence that the developer had suffered no loss and is therefore not entitled to damages. In 1994 this issue was examined by the House of Lords in the case of Linden Gardens Ltd -v- Lenesta Ltd. In 1995 the subject was again examined in the Court of Appeal in the case of Darlington Borough Council -v- Wiltshier and more recently in 1998 by the Court of Appeal again in the case of Alfred McAlpine -v- Panatown. Each of these cases has had the effect of limiting the manner of which a "no loss" defence may be effective. These matters were once again examined in the more recent case of John Harris Partnership-v-Groveworld Limited. Groveworld, a firm of property developers, and its joint venture partner Frogmore Developments Ltd, engaged John Harris as architects for a housing development to be constructed at Cricklewood in North London. The developers alleged a failure by Harris to ascertain the precise boundary line of the site which had given rise to substantial delay to the project. Groveworld claimed damages. As a preliminary issue before His Honour Judge Thornton QC, Harris argued that the joint venture agreement between Groveworld and Frogmore had the effect that 55% of all development costs were to be funded by Frogmore. As a result of this funding arrangement Harris argued that Groveworld's loss and its potential recovery should be confined to maximum of 45% of the total loss incurred. Groveworld sought to meet this argument in two ways. Firstly, it argued that it had in fact lost the whole of the sum claimed. It was irrelevant how it had funded that loss and Harris should not be permitted to avail itself of the fortuitous circumstances of Groveworld's extraneous funding arrangements. Secondly, Groveworld argued that if the joint venture agreement was to be relevant, it had still incurred 100% of its claimed loss since it had an obligation to seek recovery of the whole loss from Harris and to hold on trust for, and account to, Frogmore for 55% of any recovery. The Judge noted that Groveworld was exclusively required to make the relevant payments to the building contractor and to the other parties that gave rise to this claim against Harris. Groveworld could only have recovered those payments from Frogmore if it successfully operated the accounting terms of the joint venture agreement. Accordingly he held that Groveworld had established its loss in the sense that it had to pay out of its own pocket the loss now claimed. It was therefore irrelevant that Groveworld intended to pass on to Frogmore 55% of the sum recovered from Harris to compensate for that loss. Strictly speaking therefore it was not necessary for the Judge to continue to consider the second argument put forward by Groveworld. Here Groveworld argued that the right to recover the damages in full arose because the parties to the contract intended or contemplated that it should arise. This had the effect that Groveworld would recover damages in respect of financial loss which in fact had been borne by another party, since Groveworld was liable to account to that other party. This principle was expanded in the Alfred McAlpine case: "The right to recover 'substantial damages',……….arises because the parties to the contract intended or contemplated that it should arise, their intention being ascertained from the terms of the contract….." Judge Thornton was satisfied that Harris was aware that Groveworld was being provided with unspecified funding by a third party funder and furthermore that once the joint venture agreement with Frogmore had come into existence Harris had been aware of its terms. It was therefore within Harris's contemplation that its design work, if carried out negligently, could cause loss to a third party funder. Furthermore Harris was aware that Frogmore was the owner of the site with a substantial stake in the development. In addition, the terms of the joint venture agreement provided that Groveworld had contracted to show Frogmore the utmost good faith, and that obligation would extend to a duty to enforce rights on behalf of Frogmore where there was a reasonable prospect of recovering damages. Accordingly Groveworld would be entitled to recover 100% of the loss on behalf of the third party funder, even if contrary to his earlier findings it might be held on appeal that Groveworld had not itself suffered the loss.
CJ-9922
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