Difference in sale value or reinstatement costs?

In the following case, Thames Water was liable for the consequences of flooding at a publishing company’s premises, which damaged part and destroyed part of the company’s aviation archive. It was agreed that the publishing company was entitled to damages representing the diminution in value of its archive. The question was: should the diminution in value be measured by reference to:

  • the difference in sale value of the archive before and after the damage; or
  • the cost of reinstatement of the damaged archive?

At the trial, Thames Water claimed that the publishing company was entitled to the difference in sale value of the damaged archive (which it claimed was £300,000). The publishing company claimed £3 million, representing the reinstatement cost of the damaged archive.

The trial judge assessed the publishing company’s losses as comparatively similar, whichever method of assessment was used. The judge calculated a figure of about £2.7 million on a reinstatement basis and about £2.6 million for diminution in value. (The diminution in value figure was high because, if reinstatement costs were not used then the publishing company would be entitled to recover loss of profit on future publications which could not be published as a result of the lost archive.)

Thames Water argued that the whole claim for loss of profit must fall away; and the claim should be assessed on the basis of the (much lower) difference in sale value.

Aerospace Publishing Limited and others v Thames Water Utilities Limited [2007] EWCA Civ 3

The parties agreed that the relevant principles that applied when an owner’s chattel was destroyed by a tortuous act were set out in Maersk Colombo [2002] EWCA Civ 717:

  • The owner was prima facie entitled to damages reflecting the market value of the chattel “as is” [Editors' comments - i.e. the difference in value between the chattel before the damage and the damaged chattel]. These damages were to be assessed on the evidence, and applied regardless of whether or not the owner intended to obtain a replacement.
  • If the owner intended to replace the chattel and the damages as assessed above were inadequate for that purpose, then the higher replacement (i.e. reinstatement) value might be appropriate, to the extent that the claim was reasonable.
  • The claim would ordinarily be reasonable if it was reasonable to replace the chattel and the cost of replacement was reasonable.

Arguments for the difference in sale value

Thames Water argued that the publishing company was only entitled to the difference in sale value (without any claim for loss of profit) since:

  • the publishing company had no intention of replacing the archive - the aviation side of its business was being run down; and
  • expert evidence about changes in the market for publications relating to aircraft demonstrated that the publishing company’s plans for future publications were so misguided that reinstatement of the archive would be unreasonable.

Arguments for reinstatement costs

The publishing company argued that it was entitled to the reinstatement costs since:

  • The damaged archive was neither a readily marketable asset nor a unique chattel (such as a Picasso painting), the value of which could be assessed by reference to past auction prices. The market value was therefore problematic.
  • The only way the resale value could be realised would be to sell the archive through a number of auctions over a number of years to achieve the best reasonable price. The resale value would be realised by destroying the very characteristic (namely, the unity and comprehensiveness of the archive) which gave the archive its true value in the first place.
  • In contrast, the reinstatement value of the aviation archive was calculable (and largely agreed).
  • In these circumstances (it argued), the court should lean towards the reinstatement value unless this was prohibitive.

The court’s approach

The Court of Appeal favoured the arguments in favour of the reinstatement costs:

  • Where an archive such as this - or of an auctioneer such as Christie’s or Sotheby’s - had been destroyed, it would be “mealy mouthed in the extreme” to confine recovery to the re-sale value of individual items.
  • Reinstatement costs could be recovered even where not every item in the archive could be precisely replaced.

Is an intention to reinstate necessary for reinstatement costs to apply?

On the issue of intention to reinstate, the Court of Appeal stated:

“it must be very rare when the cost of reinstatement will be awarded to someone who does not intend to reinstate in fact”.

(The Court did not elaborate as to when such a rare circumstance may arise.)

On the facts of this case, the Court of Appeal agreed with the trial judge’s findings that the publishing company’s aviation business was not being run down; and that the publishing company intended to reinstate.

Is it necessary to establish that future business plans would be profitable, for it to be reasonable for the court to order reinstatement costs?

he Court of Appeal stated that, having established an intention to reinstate and to publish further periodicals, the publishing company did not have to establish that its future business plan was bound to make a profit, in order to recover the cost of reinstatement. (“Many reasonable business men make decisions which do not turn out as well as they had hoped”.)

Recoverability of staff costs

Thames Water objected to the amount awarded by the trial judge to compensate the publishing company for staff costs.

TheCourt of Appeal reviewed the authorities, and set out the following propositions:

  • The claimant had to establish the fact and extent of the diversion of staff time; and that the diversion caused significant disruption to its business.
  • In an ordinary case (unless the defendant could establish to the contrary) it was reasonable for the court to infer from the disruption that, had the staff’s time not been diverted, staff would have applied their time to activities which would, directly or indirectly, have generated revenue for the claimant in an amount at least equal to the costs of employing them during that time.

The Court of Appeal held that, applying these principles, staff costs in this case were (with one minor exception) recoverable.

View Aerospace Publishing Limited and others v Thames Water Utilities Limited [2007] EWCA Civ 3