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Damaging times: a short note on depreciation, inflation and exchange rates

The general rule for compensation is stated in the well-known judgment of Livingstone v The Rawyards Coal Company:

“… where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages, you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.”

This note considers changes in value that may affect the application of that compensation principle.

Depreciation

Parties will sometimes argue that, since an item forming the subject of the quantification of damages was not itself new when damaged or destroyed, the claimant should not recover from the defendant the additional damages for the cost of a new item. Whether the cost of replacement is the correct measure of damages depends principally on whether it was necessary for the claimant to incur the cost of replacement with a new item.

In Harbutt’s Plasticine Ltd v Wayne Tank and Pump Co Ltd, the claimant’s mill and plant were destroyed by a fire that the defendant was held liable for. The defendant argued that the recoverable quantum should be the difference in value of the old mill measured before and after the fire. The Court of Appeal rejected that submission and decided that the claimant could get the cost of replacing the building on a new for old basis in circumstances where there was no alternative to the claimant for replacement with new. It was not appropriate to apply betterment principles in these circumstances. The court made the distinction between the rebuilding of the old mill with new, and a second hand car that may have second hand replacements available in the market. A similar decision was reached in the earlier tortious case of Hollebone v Midhurst and Fernhurst Builders.

The principle does not just apply to land. In Bacon v Cooper (Metals) Ltd, the claimant scrap metal dealer’s fragmentiser rotor was broken beyond repair by metal the defendant supplied. There was no market for second hand rotors, which meant that to continue its business, the claimant had to source a new rotor. It was argued that he should give credit for the benefit accrued in having a new rotor, compared to the life expectancy of the rotor that had been broken. The court rejected that submission, holding that this unavoidable consequence of the defendant’s wrong was the defendant’s to bear.

The claimant’s future intention may also be relevant to the question of whether a new replacement is necessary. For example, in circumstances where the claimant had no intention of reinstating a building destroyed by fire but, instead, valued the land for its development potential only, the claimant was not permitted to recover the value of reinstatement of the destroyed building, they were limited to diminution in value (CR Taylor (Wholesale) Ltd v Hepworths Ltd, approved in Voaden v Champion (the “Baltic Surveyor” and “Timbuktu”)).

Where the cost of replacement or reinstatement is unnecessary to place the claimant in the position it would have been in absent the defendant’s wrong, the unnecessary cost will not be awarded. So, in Phillips v Ward, where a surveyor negligently surveyed a property, rectification of the property was not necessary to put the claimant in the position he should have been in, had the survey been carried out with reasonable skill and care. The quantification of loss was held to be based on the difference between the amount paid for the property and the value that ought to have been stated in the surveyor’s report. It was not the cost of rectification to take the property from its actual condition to the negligently stated higher value.

Inflation

Inflation is the phenomenon whereby a currency will buy less in relation to goods available in future than it will today. The rate of inflation is currently relatively low (at under 1%), although it reached a rate of over 8% as recently as the early 1990’s.

Pecuniary damages are normally awarded without reference to inflation because the value of goods and services will refer to market value at the date of judgment. So, in William Cory & Son Ltd v Wingate Investment (London Colney) Ltd [1981] 17 BLR 104, the cost of rectification of a defective floor was assessed at the date of judgment, rather than at the date of breach. In that case it was considered that the claimant could not have mitigated by, for example, incurring the rectification costs at an earlier date.

By corollary, if rectification of a defect must be implemented at a future date, it may be possible to claim for future inflation on the rectification costs on the grounds that to do otherwise would inadequately compensate the claimant. However, since the claimant will be put in funds earlier than the date on which it will incur the cost of rectification, a deduction for future interest on that judgment sum may also be appropriate.

Exchange rates

Circumstances may arise where damages may be quantified by reference to a foreign currency. That value may change by reference to pound sterling as one increases or decreases in relation to the other. Therefore, there is a risk that a party may be over or under compensated.

In order to guard against such windfalls or penalties, the courts of England and Wales may give judgment stated in a foreign currency. However, the problem does not disappear altogether because it may still be necessary to know what the judgment value is in pounds sterling (for example, for the purposes of enforcement).

In Miliangos v George Frank (Textiles) Ltd, the House of Lords decided that, when presented with a number of options for the date of conversion to sterling (including the date of judgment or the date of breach), the preference was for the date of enforcement of the judgment because that:

“… gets nearest to securing to the creditor exactly what he bargained for.”

The House of Lords in Miliangos sought to protect both claimants and defendants from adverse currency changes resulting in over compensation, albeit that the judgment was expressly limited to situations where there is foreign proper law, a foreign money of account and a foreign money of payment. Later cases now permit the application of a judgment in foreign currency in circumstances falling outside the Miliangos remit. The position taken by a court may be influenced by the parties’ agreement, for example in respect of the currency for payment and the date at which the exchange rate should be applied (see, for example  President of India v Taygestos Shipping Co SA (The “Agenor” [1985] 1 Lloyd’s Rep. 155).

The Civil Procedure Rules 1998 also reflect the Miliangos judgment. Paragraph 9.1 of Practice Direction 16 states that, where a claim is for a sum of money expressed in a foreign currency, it must expressly state that the claim is for payment in a specified foreign currency and why it is for payment in that currency. PD16 also requires the sterling equivalent of the sum at the date of the claim, and the source of the exchange rate relied on to calculate the sterling equivalent. The sterling equivalent may of course need to be updated as the claim proceeds.

Keating Chambers Sarah Williams

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