Supreme Court addresses difficult issue as to calculation of damages for professional negligence occurring in fluctuating property market

By Uilliam Ó Lorcáin and John C. Jermyn
3 May, 2018

The Irish Supreme Court has greatly reduced a High Court order against law firm, LK Shields, to pay their former client, Rosbeg Partners, €11m in damages for not properly registering title to a parcel of land which resulted in the withdrawal of a €10m purchase offer in 2007.

The Court of Appeal had previously upheld the decision of the High Court in Rosbeg Partners –v- LK Shields ([2009] IEHC 494).

Background
In 1994, LK Shields acted as solicitors for Rosbeg Partners in the purchase of a number of parcels of land. It was accepted by all parties that LK Shields were negligent in their failure to register Rosbeg Partners’ ownership over one of these parcels of land (“the Property”) in a timely manner. In 2008, Rosbeg Partners agreed to sell the Property to a third party for €10 million. However, despite LK Shields later resolving the registration of ownership, given the delays involved, the prospective purchaser initially reduced its offer to €8 million in February 2008, to €6 million in August 2008 before withdrawing all offers in October 2009.

High Court
Rosbeg Partners issued High Court proceedings against LK Shields seeking damages for the loss suffered due to professional negligence. By the time the action was heard in 2013, the High Court accepted that the Property had a value of €1.5 million. LK Shields argued that i) Rosbeg Partners had never reached the point of even tentative agreement in relation to purchase price, let alone an agreement to sell in 2007 and 2) that they had failed to mitigate their loss by not selling thereafter. However, the High Court did not consider it was necessary to go so far as to find there had been a communicated agreement. It was satisfied that a decision had been made by Rosbeg Partners to sell the Property for €10 million in 2007. Furthermore, it was satisfied, that had the problem with the title not emerged, a contract would have been entered into and the Property sold at that price soon after.

As regards the failure to mitigate argument, the Court found that Rosbeg Partners were not irresponsible in their negotiations to mitigate their losses and in so doing awarded Rosbeg Partners €11 million in damages (including consequential losses). LK Shields appealed that judgment to the Court of Appeal.

Court of Appeal
Dismissing the appeal, the Court of Appeal stated that the trial judge’s finding that Rosbeg Partners had an agreement to sell the Property for €10 million was a finding of fact and it was prevented from interfering with that finding due to the principle outlined in Hay v O’Grady i.e. if the findings of fact made by a trial judge are supported by credible evidence, the Court of Appeal is bound by those findings.

Supreme Court
LK Shields applied to the decision to the Supreme Court.

Delivering the Court’s judgement on 18 April 2018, Mr Justice O’Donnell, directed a reduction in the €11m sum of damages awarded in the High Court to €5.2 million on the basis that LK Shields could not be held liable for losses that occurred after they obtained actual registration of the title to the Property in October 2008.

In reaching his decision Mr Justice O’Donnell considered the complex question of whether LK Shield’s negligence made them responsible for some or all of the losses suffered by Rosbeg Partners due to the decline of the property market and Rosbeg Partners’ own market decisions.

The nature of LK Shield’s negligence in this case was a failure to do something which could be done and was eventually done. Therefore, Mr Justice O’Donnell determined that the measure of damages was the cost of substitute performance of the duty and any foreseeable loss of value caused by the delay in doing so. As regards the drop in value of the Property after October 2008, this could not be attributed to LK Shield’s negligence, at least not without particular evidence. Like all other property owners at that time, Rosbeg Partners were experiencing loss of value due to market conditions. In his judgement Mr Justice O’Donnell advised that:

“if the market is static or rising, it may be that the defendant escapes without any liability for damages under this heading, but where as here the market is falling, then the plaintiff is entitled to recover the difference in value of the property between the date at which the works ought to have been done, which would have allowed for a sale, and the point at which that problem could reasonably have been remedied, assuming that it can be established that the plaintiff intended to sell. At that later point the plaintiff has been put back in the position they ought to have been in had the defendant performed its duty. It may often be appropriate in such circumstances to take into account any difficulties in obtaining a value at that later point, and in some cases it may be permissible to take into account that the plaintiff may have lost a special purchaser”

Mr Justice O’Donnell further advised that when dealing with calculations of loss, it is important for courts to recognise it is "a lot easier to make profits on paper than in real life" and particularly when the exercise is being carried out in retrospect. Also, he stated in such cases, the Courts should attempt to apply “common sense and some degree of scepticism” when considering negotiations that took place between business people some time ago.

Conclusion
This decision provides important guidance from the highest court in Ireland regarding the difficult issue of the calculation of damages for losses arising in a fluctuating property market as a result of professional negligence. It effectively limits the defendant’s liability to the cost of substitute performance of the duty and foreseeable loss of value caused by the delay in situations where the negligence relates to a failure which could be rectified and was eventually rectified.

While many of the cases relating to the property market crash of 2008 have been resolved at this stage, this decision brings some welcomed clarity to the area.

For more information on the content of this Insight contact:
Uilliam Ó Lorcáin, Partner, uilliam.olorcain@rdj.ie, +44 (0) 2073376178