Case No. QBENF 1997/1703/1
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(MR RECORDER PLAYFORD QC)

Royal Courts of Justice
Strand
London WC2A 2LL

Date: Tuesday 27 July 1999

B e f o r e:

THE MASTER OF THE ROLLS
(LORD WOOLF)
LORD JUSTICE HENRY
LORD JUSTICE WALLER
- - - - - -

SKANDIA PROPERTY (UK) LIMITED
VALA PROPERTIES BV
Plaintiffs/Appellants

- v -

THAMES WATER UTILITIES LIMITED
Defendant/Respondent
- - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 421 4040
Official Shorthand Writers to the Court)
- - - - - -

MR D ALLEN (Instructed by Messrs Ince & Co, London EC3R 5EN) appeared on behalf of the Appellant

MR R AKENHEAD QC  (Instructed by Messrs Berrymans Lace Mawer, London, EC2M 5QN) appeared on behalf of the Respondent
- - - - - -
J U D G M E N T(As approved by the Court)
LORD JUSTICE WALLER:  
This is an appeal from the judgment of Mr Recorder Playford QC sitting as an Official Referee given on 21st August 1997.  The issue before the judge was the amount of compensation to which Vala Properties B.V. (Vala) were entitled from Thames Water Utilities Limited (Thames Water) as a result of the escape of water from a pipe vested in them, which, over a period of 5 weeks from 21st October 1991, flooded the basement of Vala's premises at 2/4 Cockspur Street London SW1.  The judge awarded £37,500, and Vala contend that the award should have been in the sum of £297,954.75.  The difference between the two figures rests on one issue.  Vala say that following the flooding they were advised by experts that the flood had damaged the effectiveness of the waterproofing system present in the building prior to the flood; that a proposed tanking system, the Sika system, "was the only practical solution for repairing the water damage to the building and eliminating the risk of further water damage"; and that it follows that the cost of installing that tanking system is recoverable.  Thames Water say that the waterproofing system was not effective prior to the flood; it was not damaged by the flood; and they thus say that the cost of such remedial work as was advised is not something for which they should be liable.

The undisputed facts

The judge sets out the history of 2/4 Cockspur Street in great detail.  There is no challenge to those findings until his findings in relation to the damage caused by the flood. 

It is asserted in relation to some of the facts, that they were unknown to Vala and their experts (and it is right to say unknown to Thames Water and their experts) at the time that advice was given and decisions taken following the flood.

That history can be summarised as follows.

2/4 Cockspur Street is one of three properties forming a triangle near Trafalgar Square.  One of the other three properties is Canada House which fronts onto Trafalgar Square, and the other is Oceanic House, and all three properties have Pall Mall East running along the top or northern flank of the triangle.  The site is old.  The cellars that suffered the ingress of water were old Georgian cellars.

The main water table may have been lower but in relation to 2/4 Cockspur Street there was a perched water level about 1.2 metres above the level of the basement floor.  This was a factor contained in a report of D Y Davies of 24/1/89 and was a factor not known to Vala or its experts in 1992.

The ingress of water had been a problem in the cellars over many years and various steps had been taken to try and prevent the same.  That almost certainly included applying a waterproofing render to the inside of the walls.  During 1987 through to 1989 Speyhawk plc Group of companies carried out a major refurbishment of the building.  They did so through contractors Tellings Ltd and the substantial nature of those works can be gauged from the contract price of over £11.5m.  D Y Davies were the architects for the project.

Some work intended to cure the water problem in the cellars was carried out during the first period of the refurbishment; that too may well have included putting on a waterproofing render or replacing such rendering with other rendering, but towards the latter part of 1988 it was clear that the defences were failing.  Mr Sutherland, of D Y Davies, was instructed to make a thorough investigation and come up with a permanent solution.  The result was the D Y Davies report of 24th January 1989.

The report recorded the sorry state of “all basement areas” in these terms: “water is entering through cracked or damaged waterproof rendering, screeds and untreated floors and walls.  Other damp areas may occur in dry areas in the future as a result of the proposed water prevention works”.  The recommendation as a permanent solution was “pressure grouting the entire retaining wall at basement level and sub-basement levels, the return walls up to the building line, the basement slab so far as was necessary to prevent lateral ingress of water and certain parts of the LEB room in the sub-basement”. 

Terresearch Ltd were awarded the contract to carry out the necessary work and were prepared to provide a 1 year guarantee.  The judge, on page 7 of his judgment, describes the system and makes a comparison with the Sika system installed by Vala after the flood in these terms:- 
	
	"Pressure grouting a wall involves drilling a number of holes, generally 25 millimetres in diameter and at 600 millimetre centres, both horizontally and vertically, through the inner skins (and through render, plaster or whatever else may be on the inside of the skin) and injecting waterproof grout under pressure into the cavity between inner and outer skins.  Theoretically, if done well it should be effective, but the witness evidence was unanimously to the effect that it is an imprecise science.  And it is not hard to see why: since the impermeable barrier is being formed between the outer and inner walls, it cannot be seen and, whether on account of obstructions or human failing or a refusal of the grout to go precisely where it is meant to go, one can never be entirely sure of the complete integrity of the system.  Bearing in mind the propensity of water to discover over time any weakness of the barrier set against it, I was not surprised to find Mr Robinson less than enthusiastic about it.  The lack of any guarantee offered by Quine and the I year guarantee given by Terresearch may be compared to the 10 year guarantee that would follow the full Sika treatment and the comparison tells its own tale.  But, although costing about £130,000, it is cheaper than the full Sika treatment and, granted the progressive approach to a permanent solution that DY Davies pursued, the decision to pressure grout may be seen as reasonable.  By a “progressive approach” I mean that DY Davies addressed the problem by starting with the least expensive and disruptive solution that was consistent with a reasonable prospect of success, with the intention, if that was seen not to work, of going on to consider other more difficult and consequently more costly solutions."

The judge then continued:- 
	
	"And thus it was that in 1989 Terresearch carried out their pressure grouting.  Their work inevitably meant riddling the retaining wall with 25 millimetre holes and thereby destroying the integrity of whatever render was present, not that there was present any effective or systematic render.  Had there been a Sika guarantee, which of course there was not, it would have been invalidated.  But Mr Sutherland made it clear to me that DY Davies were not relying on anything that had gone before; they regarded the pressure grouting as the permanent defence.  The drill holes were filled with grout, so that the surface was flush with the adjacent render, and then the whole was covered with one or two coats of Tamseal slurry.  Tamseal slurry is not the same as Tamseal render and is generally used as a thin base for the latter.  It has some, albeit limited, water proofing qualities but in this instance it was used by Mr Sutherland as a finish to “sweeten” the work surface, covering Terresearch’s holes, the areas of replaced render and such of the original render as remained. 
	
	Mr Sutherland made it plain that all the work that was effected to the inside of the wall, as I have described above, was regarded by him as purely decorative.  For the purpose of water proofing, he relied on none of it, that is to say none of the render, whether replaced or original, nor the Tamseal.  He had made the considered decision to use pressure grouting and he relied on that and that alone."

The finding of the judge is not challenged, but at the forefront of Vala's case is the point that none of the facts were known to Vala or its experts in 1992.

In September 1989 Speyhawk had parted with its interest in the property to Skandia Property Management Ltd (Skandia) a subsidiary of the buildings insurers Skandia Insurance Limited.  We have not been shown any of the contractual arrangements under which this transfer took place, but from the judge's judgment (page 9) it appears that there may have been some term under which Speyhawk confirmed the exercise of due diligence in relation to water proofing the basement.  In any event it is common ground that by the end of 1990 there was still a damp problem - “probably 6 or 7 damp patches at sub-basement level in the corridor by the LEB room and at basement level especially in vaults 4-6”.  Through 1991 it seems these patches became more noticeable, and the judge found they had been there for some 18 months before the flood in October 1991.  Indeed in June 1991 Mr Bolton on behalf of Vala wrote to Speyhawk asking them for their “proposals for eradicating the serious damp penetration in the basement corridor and in the vaults along the Pall Mall East elevation”.

The response of Speyhawk on 24th October 1991 (written as the judge found before news of the flood had reached them) was:- 
	
	"..... there is no permanent and assured answer to eradicating dampness.  Skandia were fully aware of the construction and the specification of the basement works and recognised the risk of incorporating existing foundations and retaining structures within the building.  Considerable works have been carried out which have been on the whole successful, except in the two or three isolated areas.  Speyhawk is therefore not prepared to carry out any further waterproofing attempt, except for carrying out redecoration to the affected areas”, which will be carried out shortly."

Speyhawk in fact obtained quotes from Terresearch which seemed to go further than redecoration in that they quoted for pressure grouting the areas in question.  That quote is relied on by Vala as indicating the size of the problem in that the total quote was for £3,835.65 of which £2,700 was attributable to the relevant areas.  The judge found that the size of the quote was not of telling significance.  He found that it was the mere fact that after a refurbishment costing many millions there were now signs  showing all might not be well, which made it serious.  He thought Mr Bolton had used the word serious as an  accurate description of his view.  Vala and their experts knew nothing of this quote obtained by Speyhawk and indeed knew nothing of the involvement of Terresearch either originally or at this stage when making their decisions in 1992.

The Flood on 21st October 1991

There is no dispute that as a result of the escape of water from Thames Water's pipe there was an incursion of water lasting for 5 weeks.  There is no doubt that damage was caused to the building or parts of the building for which Thames Water were liable to compensate Vala under Section 6(1) of the Water Act 1981 which provides as follows:-

	"Where an escape of water, however caused, from any pipe vested in any statutory water undertaker causes loss or damage, the undertakers shall be liable .... for the loss or damage."

The judge awarded damages to compensate Vala for all damage or loss except the cost of installation of the Sika system.  His findings of fact relating to the installation issue can be summarised in this way.  First, the flood did not breach the integrity or remove the integrity from a comprehensively waterproofed building.  "The ingress stopped as soon as the leak was repaired.  Had there been damage to the waterproofing arrangements, water from the ground would have continued to enter the building".(page 25(h)).  There was thus no damage to the waterproofing system. Second, the flood did not in fact physically damage the render left as only decorative during the works carried out by Terresearch, and did not in fact damage the grouting installed by them.  "The pressure grouting reverted to being as good - or as poor - as it ever had been." (page 24(f)).

Vala challenge the judge's findings about physical damage to the render, but do not challenge the other findings.  I do not think that the judge's finding as to physical damage to render there for only decorative purposes is of any real significance in reaching the answer in this case.  If there was any render of simply decorative nature to be repaired, it was not a vast quantity, and could have been done relatively inexpensively.

I was in fact unpersuaded by Mr Allen that the judge's finding on this aspect should be reversed, but as I stress again I do not believe it to be of any real relevance.

The real question is whether once there is a finding that the waterproofing system present in the building prior to the flood was not made any less effective by the escape of water from Thames Water's pipe, can Vala still show that the expenditure on installing a new and effective waterproofing system is loss or damage caused by Thames Water.

The arguments

Mr Allen for Vala submits that the following is the correct process of reasoning.  First, Vala were the victim of a tort or breach of statutory duty because at least some part of their building had been damaged by the escape of water.  Second, Vala took advice from independent experts who advised that the proposed internal tanking system was the only practical solution for repairing the water damage to the building and eliminating the risk of further water damage.  That advice was given on the basis that an effective waterproofing system was there prior to the flood, and thus the elimination of "the risk of further water damage" was intended by the experts to achieve the restoration of what was there before.  It was not in their minds to produce an effective system where there had not been one.  Third, the advice was not negligent on the information that the experts had.  Fourth, accordingly Vala had no choice but to follow the advice of the experts and incur the expenditure, and that should thus be recoverable from Thames Water.

Mr Akenhead QC's argument is primarily that the reasonableness of the conduct of Vala and/or their experts does not enter into it.  He submits that the fact is that the waterproofing system prior to the flood was not damaged in that it was as effective immediately after the flood as it was before.  Accordingly the cost of installing a different and more effective waterproofing system is simply not the quantification of any damage or loss caused by the escape of water.  In the alternative he says that if reasonableness is relevant, then since at this stage it is the assessment of damage caused which is under consideration, and not mitigation of damage, the onus lies upon Vala to demonstrate that it was reasonable to incur the expenditure they did.  Simply relying on the advice of experts is not sufficient to discharge that onus.  He submits that the judge was right so to hold (page 18), and was right in holding that in fact Vala did not act reasonably (page 26 paragraphs 3 and 4).

In relation to mitigation it does appear (although the cases were not actually cited to us) that it is for the defendant to prove that a plaintiff has acted unreasonably; as note 24 in Halsbury's Laws of England 4th Edition Volume 12(1) paragraph 859 puts it:- 
	
	"The opinion to the contrary in Selvanayagam v University of the West Indies [1983] 1 All ER 824, [1983] 1 WLR 585, PC, is opposed to prior and subsequent authority: see Roper v Johnson (1873) LR 8 CP 167; Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC 1130n, [1967] 2 All ER 353, HL; London and South of England Building Society v Stone [1983] 3 All ER 105, [1983] 1 WLR 1242, CA; Gebruder Metelman GmbH & Co KG v NBR (London) Ltd [1984] 1 Lloyd’s Rep 614 at 631 per Sir John Donaldson MR; Richardson v Redpath Brown & Co Ltd [1944] AC 62, [1944] 1 All ER 110, HL."

On the other hand, where for example there has been trespass to land, paragraph 870 of the same volume says "If damage or loss is caused substantial damages may be recovered, and the plaintiff is entitled to the diminution in the value of the land which may be the cost of repair and re-instatement.  Where that cost exceeds the diminution in the market value of the land, the award of the higher figure will depend on reinstatement being reasonable."  That would appear to place the onus on the plaintiff, and it would seem to me that logically the judge was right in saying that since the plaintiff must prove that he has suffered damage, if he is to rely on having acted reasonably in order to establish that damage, then the onus must be on him to establish that reasonableness.

The authorities

We had cited to us Galoo Ltd v Bright Graham [1994]1 WLR 1360 in particular  Glidewell LJ's judgment from 1369 to 1375.  In that case it was agreed that in the context of that case the principles applicable to liability in either contract or tort are the same (1369H).  It is common ground that in assessing liability under Section 6 of the Water Act 1981, the court is not applying any different principles.  At the end of the passage at 1374H Glidewell LJ poses the question "How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?", and he answers it by applying the Australian decisions to which he had been referred "By the application of the court's common sense". 

In a recent Lecture "Common Sense and Causing Loss" given on 15th June 1999 Lord Hoffmann has suggested that simple appeals to common sense do not provide the answer.  He argued that in answering the question whether a certain loss or damage was caused by a breach of duty, what was really required was to identify the right question as to what damage the duty was meant to guard against or from which a party was intended to be protected.

Mr Allen relied on The Sivand [1998] 2 Lloyd’s Rep 97, and in particular the judgment of Hobhouse LJ in that case.  It is of interest that he commences his judgment by saying that "As is often the case, once the question has been correctly identified, the answer to be given to that question is straightforward."  In that case the plaintiffs' harbour works including dolphins had been damaged.  They employed a contractor to repair the damage.  During the repair work a jack-up barge collapsed due to unforeseeable sea-bed conditions.  The plaintiffs under the contract were liable to pay the extra costs of the sub-contractor.  Hobhouse LJ's legal analysis is at page 107 concisely summarized under five heads as follows:- 
	
	"(1)  The defendants negligently and in breach of the duty of care which they owed to the plaintiffs, damaged the plaintiffs’ property (the harbour works including the dolphins) thereby causing the plaintiffs loss. 
	
	(2)  The plaintiffs’ cause of action was then complete and the sole remaining question was the assessment of the plaintiffs’ loss. 
	
	(3)  The plaintiffs were under a duty to mitigate their loss and in reasonable mitigation chose to employ the contractors on the ICE terms to carry out the necessary repair work. 
	
	(4)  The cost of this mitigation was the sums which the plaintiffs became liable to pay to the contractors for the carrying out of the repair work under the ICE contract.  This cost included the sum of £178,2350.47. 
	
	(5)  The defendants’ liability in damages to the plaintiffs includes the expenditure which the plaintiffs have thus incurred in the reasonable mitigation of their loss.  There is no allegation that the steps which the plaintiffs took increased rather than mitigated their loss but, even if they had, this would have made no difference to the defendants’ liability provided that the plaintiffs had acted reasonably."

Pill LJ put the matter this way. He would accept the above legal analysis but thought there should be added to proposition 2 the words "for which the defendants are responsible".  His conclusion at page 109 was:-
	
	"The defendants accept that the damage to the harbour works caused by their vessel had to be made good and that it was reasonable for the plaintiffs to contract with contractors who would do the work on the terms of the ICE contract.  Clause 12 of the conditions of the relevant contract provides an entitlement to additional remuneration for the contractor who encounters physical conditions which could not reasonably have been foreseen by an experienced contractor.  Having conceded that it was reasonable for the victim of the tort to accept a condition involving a contractual liability for unforeseen physical conditions, the defendants seek to argue that they are not liable for the contractual liability upon the plaintiffs held to result from the operation of the clause."

Was the judge right?

The process of reasoning of the judge can I hope fairly be summarised as follows:- 

1.  At the trial Vala had in fact failed to establish that any physical damage was done to the render at all, had failed to establish any damage to the pressure grouting and failed to establish any damage to the asphalt or bitumen membranes.  Vala had thus failed to establish any damage to the waterproofing arrangements.  (1.  (a)-(h) in judgment at pages 21-25).  

2.  The render was not part of and indeed there was no comprehensive waterproofing system that called for reinstatement.  Vala’s assumption through itself and its experts, that the render was part of such a system and that such a system existed, was not reasonable.  Even if the assumption was reasonable that would simply have been one factor in considering causation (2.  In judgment at pages 25-26). 

3. Vala did not in fact approach the question of what to do on the basis of repairing damage; that is why no-one applied their mind seriously to what damage there was; the question posed was thus “how best to secure the property for the future?” - a perfectly reasonable question but nothing to do with repairing damage. (3.  In judgment at page 26). 

4.  The flood provided the occasion that brought the fact to light that the building was not watertight.  What caused Vala to act as it did was not the escape of water or injury caused by it; it was a desire to have a watertight building once they realised that that which they had was far from watertight. (4.  In judgment at pages 26-28). 

The conclusion that Vala should not be entitled to recover seems to me to be right.  Mr Allen would however criticise the judge if he was to be understood as saying that there was a conscious decision to incur the cost of installing the Sika system so as to have a waterproof building rather than as the response to what Vala genuinely considered was damage caused by the escape of water.  In my view that is not actually what the judge was finding.  He was really finding that because proper investigations were not done, and because Vala did in fact want a waterproof system, Vala took a decision to instal a Sika system, the cause of their decision must in law be taken to be that desire rather than to repair damage.  

In my view, the reason why Vala should not be entitled to recover can be put very simply on the basis that the assumption that Vala and its experts made that damage had been caused to a comprehensive waterproofing system was not reasonable, and it was thus not reasonable to replace what was there with such a system.  That being the simple answer it is not really necessary to explore the situation that the judge had in mind on the basis that the assumption that there was a comprehensive waterproof system prior to the flood, was reasonable.  But since some argument was addressed to us on this aspect I would simply put the matter in the following way.  If there has been an escape of water that causes some physical damage then prime facie it is only the cost of reinstatement of that physical damage which is recoverable.  If a plaintiff is to recover damages for something beyond the cost of reinstatement of physical damage then he must on any view show that it was reasonable to incur expenditure beyond that quantifiable figure.  It might in certain circumstances be reasonable to assume that physical damage had been incurred where a full investigation of the same was not reasonably possible.  It would certainly be appropriate that a plaintiff should recover the reasonable costs of investigating the damage inflicted.  During argument for example, the question arose as to what would be the situation if a plaintiff was advised that certain wiring hidden in the wall might have been damaged.  If the advice was that it was impossible to check the accuracy or otherwise of that advice then the cost of putting in fresh wiring might well be recoverable.  What should be emphasised is that it must be rare if ever that a plaintiff will be able to establish the reasonableness of any assumption of damage to something which is accessible and inspectable.  Certainly, simple reliance by a plaintiff on an expert cannot be the test as to whether a plaintiff has acted reasonably in making an assumption, albeit, provided the plaintiff has provided the expert with all material facts and the expert has made all reasonable investigations, the advice will be a highly significant factor.  

I should deal with a further submission of Mr Allen in relation to the finding of reasonableness.  Mr Allen was, I think, suggesting that because of an interchange between the judge and counsel during the evidence, it really was not open to the judge to find that the plaintiffs had acted unreasonably.  I think it was so open to the judge for the following reasons.
To put in issue the reasonableness of the decision in this context is not to charge dishonesty or impropriety or to allege a try on.  Such charges, when hinted at or even expressly made, were expressly withdrawn on behalf of the defendants.  But the reasonableness of the decision by Vala and its experts in the sense relevant to causation, which does not require proof of conduct amounting to professional negligence or something of that sort, was, as it seems to me, always in issue.  Indeed the very first questions put by Mr Bacon in cross-examination of Mr Forsyth, a Director of DY Davies up to May 1996, and the first witness in the case, were aimed at the issue whether Skandia or Vala knew that DY Davies had been involved with the refurbishment, whether anyone had made any inquiries of DY Davies, and whether there would have been any difficulty in DY Davies providing the information (see pages 4 and 5 of the Transcript Bundle).  Those questions were explored without protest and can only have been relevant to this issue.  There were it seems times at which Mr Bacon for the defendants was suggesting that Vala's case was a "try-on", and when that charge was made objection appears to have been taken.  During cross-examination of Mr Godfrey, for example, the charge was made and the judge intervened and that led to Mr Allen, with his clients in court, objecting in the strongest terms to there being any suggestion of dishonesty or impropriety.  In the result Mr Bacon for the defendants unreservedly withdrew any suggestion of dishonesty or impropriety (see page 141 of the transcript).  However during the interchange with the judge Mr Bacon made clear that what he was attempting to do was to challenge the plaintiffs' case on reasonable reliance on experts, which line of questioning the judge allowed to continue (page 138). 

It is true that in his final submissions, so far as they were in writing, Mr Allen made the point that if unreasonableness was to be alleged by the defendants, they should have pleaded it but he was asserting that the onus was on the defendants to establish unreasonableness (see paragraphs 29 to 31).  But he went on wisely to deal with reasonableness (see paragraph 32).  I do not think that any pleading point was open to Mr Allen, because in relation to establishing causation the onus was on his clients to establish the reasonableness of the assumptions made and the reasonableness of the expenditure incurred.  As I see it the matter was explored at the trial, and it was a matter for Vala to establish.  

Mr Allen also relied on the fact that Mr O'Brien of the loss adjusters for Thames Water was told precisely what it was intended to do, but did not protest.  As the judge pointed out (page 15), and as Mr O'Brien made clear in his evidence, (page 200) he had no idea what system had been employed for waterproofing before the flood, and he did not have the same means as Vala for finding out.  As the judge said "He was faced with a pressing demand for re-tanking based on an assertion that there was already a tanking system in place and that it had been physically damaged, which he regarded as doubtful. . . . .  At no stage did Mr O'Brien agree to the proposed works."  This point in my view does not assist Mr Allen.

Conclusion

In my view the judge was entitled to make the findings of fact that he did, and he did so in a careful and fully comprehensive judgment.  In my view he also reached the correct conclusion in law and this appeal should be dismissed.

LORD JUSTICE HENRY:  I agree. 

LORD WOOLF, MR:   I also agree.

Order:  Appeal dismissed with costs.  Leave to appeal to House of Lords refused.