Before:
Lord Justice Glidewell
Lord Justice Beldam
Lord Justice Nolan
 
 

B E T W E E N

JUDGMENT
 
DATED: 20 December 1991

GLIDEWELL LJ

This is an appeal against a decision of His Honour Judge Esyr Lewis QC sitting as an official referee on 13th July 1990 when he gave judgment for the plaintiffs, Newton Woodhouse, for £21,645.59 with £18,995.35 interest, making a total of £40,640.94.

The plaintiffs are, and were at all material times, a partnership. The partnership was represented throughout in this transaction by Mr Newton, who gave evidence at the trial. The defendant company was controlled by Mr Marcus, who also gave evidence.

The claim arose out of a contract between the parties for the construction of a building at St Ives, Cambridgeshire, to be used for industry or warehousing. The site was owned by Trevor Toys. This was phase 2 of a development. Phase 1 had already been completed, the building being constructed by a limited company of which both Mr Newton and Mr Woodhouse were directors. The reason why this contract was with the partnership rather than the company is irrelevant, but it is important that the individuals had already had a business relationship for some years.

The phase 2 building was steel-framed. The framework was erected by specialist contractors who were directly employed by Trevor Toys. Newton Woodhouses' part was to provide the labour for the remainder of the works of construction, to supply the necessary materials and to supervise all the work.

The action was commenced by a writ issued on 29th June 1984, specially endorsed with a statement of claim. Newton Woodhouse claimed in the alternative:

(i) £20,073.80 being the outstanding balance of claims made by Newton for interim payments and unpaid; or

(ii) £28,118.02 on a quantum meruit, that is, the fair and reasonable cost of the work done and materials supplied by the plaintiffs;

(iii) together, in each case, with interest.

It was common ground that on 15th March 1982, when the building was only partly completed, Newton Woodhouse ceased work, withdrew from the site and did not return.

By its amended defence, Trevor Toys pleaded that the contract between the parties was that Newton would carry out the necessary work and supply the materials for a fixed maximum price. Trevor Toys also admitted liability to pay for three extra items, but denied that Newton Woodhouse were entitled to claim for six further items alleged to be extras. The defence pleaded that in all the invoices, which together made up the plaintiff's claim on the first basis, Newton Woodhouse had included VAT, which was not chargeable since the work was for the construction of a new building.

Overall, the defence was that by 15th March 1982 Trevor Toys had already paid Newton Woodhouse sums which in total exceeded the amount to which Newton Woodhouse at that date were entitled. The plaintiffs had submitted two further invoices, numbers 22 and 23, but by reason of the over-payment Trevor Toys had not paid the amounts claimed in these invoices. The defendant's refusal to pay on these two invoices was the reason why Newton Woodhouse had ceased work on 15th March 1982, but in so doing Newton Woodhouse were in breach of, and repudiated, the contract.

The defendant counter-claimed damages for alleged faulty workmanship, for delay in completion of the job by another contractor and for the alleged excess costs of materials.

By way of reply the plaintiffs put in issue the nature and terms of the contract. There was no maximum price. Materials were to be charged at cost to Newton Woodhouse, less any trade discount, if Trevor Toys paid promptly. The cost of plant and equipment was to be reimbursed by the defendant. It was an express term of the contract that the defendant would pay promptly on receipt of Newton Woodhouses' invoices, which were to be submitted as requests for staged payments. The defendant's failure to pay on invoices 22 and 23 was a breach of the contract which repudiated it and entitled the plaintiffs to cease work. At that date the work carried out and materials supplied exceeded in value the amount paid together with invoices 22 and 23. The extras charged had been carried out and payment for them was due. The defective work was denied. It was admitted that VAT was not chargeable or payable on new buildings. I shall have to return later to the pleading relating to VAT.

The judge was therefore faced with a multiplicity of issues, some of which involved much consideration of detail. The hearing lasted a total of 23 days. His judgment is lengthy, but it contains clear findings and reasons for them.

The first and amongst the most difficult of the issues for the judge to decide was, what were the terms of the contract? The judge found that the contract was concluded during a telephone conversation between Mr Marcus of Trevor Toys and Mr Newton, following the receipt by Mr Marcus of a letter from Mr Newton dated April 1981 containing a quotation for the work and the materials. The judge found that Newton Woodhouse contracted to erect the building for a fixed price for labour of £35,614, including overheads, together with the cost to them of materials and the hire of necessary plant. It was expressly agreed that payment would be made by the defendants in stages, against invoices submitted by Newton Woodhouse, and that in return for prompt payment the defendant would be entitled to deduct any trade discounts allowed to Newton Woodhouse on materials. The agreement for stage payments was a repeat of the agreement which had been made between the defendant company and the limited company which had erected the building in stage 1. It should be noted that the contract did not call for certification of the invoiced amounts by any independent or professional person.

Trevor Toys sought leave to appeal against some of these conclusions, but leave having been refused the conclusions are not now challenged in this appeal.

In summary, the judge found:

(a) at 15th March 1982 there was a sum owing to Newton Woodhouse as reimbursement of the cost of materials;

(b) most but not all of the items claimed by Newton Woodhouse as extras were properly so claimed, and the plaintiffs entitled to be paid for them;

(c) Trevor Toys were not entitled to reclaim any sums paid as VAT;

(d) the complaints of bad workmanship were rejected and the counter-claim dismissed.

It followed from these conclusions that the judge decided that at 15th March 1982 Newton Woodhouse were entitled to be paid the amounts claimed in invoices 22 and 23, and Trevor Toys repudiated and breached the contract by failing to pay these sums. Newton Woodhouse were therefore entitled to cease work at that date.

This conclusion also is not challenged before us, save that the judge's finding about VAT is in issue. However, this does not affect the judge's overall conclusion as to the defendant being in breach, but is solely relevant to the amount the plaintiffs are entitled to recover.

The judge then turned to consider the basis on which Newton Woodhouse were entitled to claim and the amount of a justified claim. He said:

"I am left in no doubt after my review of the disputed items ... that the value of work done up to 15th March 1982 was substantially more than was paid by the defendants before work on site ceased."

After ceasing work Newton Woodhouse submitted 7 further invoices in addition to numbers 22 and 23, dated between 16th March 1982 and 18th May 1982. The judge decided that a claim based on these invoices was not within the contract and, therefore, the plaintiffs were not entitled to formulate their claim on their first basis. He held, however, that they were entitled to recover a fair and reasonable amount for the cost of labour expended on the work up to the time when they withdrew, including overheads; for materials supplied and plant hired the judge decided that the plaintiffs were entitled to be paid at the rates invoiced to them, including discounts (by which I take it the judge meant not deducting discounts).

In this appeal there are two issues. They are, as expressed in the notice of appeal:

1. "The Plaintiffs ought to have been required to give credit for the VAT payments made as temporary loans."

2. "The Plaintiffs' recovery ought not to have been measured on a quantum meruit but should have been confined to the contractual entitlement."

The second is the major issue, but it is convenient to deal with the VAT point first. The judge said:

"The parties' arrangements and contentions with regard to VAT are difficult to follow and to unravel."

However, he succeeded in making the position clear. It was common ground that VAT was not chargeable on new building works at the time when the contract was made and carried out. It followed that the plaintiffs would have to pay VAT on materials supplied to them, but having registered as taxpayers with the Customs and Excise, they would normally have been entitled to recover the amount of VAT paid on materials for the works. However, when the work started in 1981 there was a strike in the VAT department of Customs and Excise, which resulted in the plaintiffs being unable to recover their payments for some time.

The defendants therefore agreed that the plaintiffs should charge in their invoices to Trevor Toys the cost of materials including the VAT paid. It was orally agreed that the defendant would pay these invoices, but later the plaintiffs would reimburse the total of the VAT when they in turn were able to reclaim it from the Customs and Excise.

However, in the event this is not what happened. The defendant paid on the earlier invoices, including the VAT. The plaintiffs accounted to the Customs and Excise for the VAT, but did not reclaim it. On the other hand, the defendant claimed the amount which it had paid to the plaintiffs as input tax as a deduction from the amount of VAT for which it was liable. Thus, in the event, both parties were in the same position financially as they would have been if the oral agreement had been carried out.

At the trial the defendant was seeking to reclaim the amount of the VAT which it had paid on the materials, asserting that it might then be obliged to reimburse the Customs and Excise for the amounts so recovered. The judge concluded that it would be unjust at that date for the defendant to be credited with those sums. He therefore refused to allow this part of the defendant's claim. Mr Lamb, for the defendant, argues that there is no legal basis for this conclusion by the judge.

However, Mr Janusz, for the plaintiffs, submits that the defendant is only entitled, if at all, to make deductions from the plaintiff's claim in accordance with the pleadings. He points out correctly that the oral agreement between the parties about VAT, to which I have referred above, is set out in the reply. The defence in this respect is contained in paragraph 9. This reads: "The Plaintiff, in the invoices rendered to the Defendant and in the sums claimed herein has purported to include Value Added Tax. The said Tax being neither chargeable nor payable upon new buildings, the Defendant denies any liability in respect of the same and claims to deduct the sum below particularised from the sums claimed herein by the Plaintiff."

The particulars which follow relate to six invoices, the first two of which were invoices 22 and 23, dated between 21st January and 18th May 1982. The amount sought to be deducted as claimed on those invoices was £1,364.45.

Before the trial the plaintiffs had already conceded that, since the Customs and Excise strike was over and they could reclaim the VAT on these invoices, they were not properly entitled to charge the defendant these amounts. In other words the point made in this paragraph of the defence was conceded.

Mr Janusz submits that the further attempt by the defendant to reclaim or to set off against the plaintiff's claim the amount of VAT claimed by the plaintiffs and paid by the defendant on earlier invoices was not raised in the pleadings, and not at any time before the trial. If it had been raised, he further points out, the plaintiffs might very well have been able to assert that the defendant by its conduct was estopped from reclaiming the VAT on earlier invoices. This, however, was not a matter gone into at the trial since the claim had not been pleaded. This, he submits, was a proper basis for the judge's conclusion, although not set out in the judgment.

In my view the submission by Mr Janusz is correct. I do not think that the defendant should have been allowed to argue at the trial that the earlier VAT should be recovered without amending the defence and, indeed, it may be that the judge did not appreciate that it was seeking to go beyond the pleading. I also agree that the plaintiffs might well have had a perfectly valid response to this point if it had been raised. Accordingly I agree that the judge was right not to allow the defendant to deduct the amount of VAT from the plaintiff's claim.

I now turn to the more fundamental question of the basis upon which the plaintiffs were entitled to advance their claim.

I start by considering how the judge approached this final problem. Before I do so it is necessary to explain two matters which emerged in evidence. First, Mr Newton gave evidence, which the judge accepted, that when he was asked by Mr Marcus to tender for this contract he prepared for his own benefit a draft bill of quantities. He then priced this, by calculating his labour charge at a rate which would include overheads and contingencies, and estimated the cost of materials. When he came to make his final offer, which was accepted by Mr Marcus, he reduced the labour charge by 5%. This labour charge came to be known during the hearing as the "tender rate".

Secondly, Mr Humphries, who gave expert evidence for the plaintiffs, measured the work and thus calculated the amount of labour expended by the plaintiffs up to 15th March 1982. In one of his calculations, which the judge accepted for the purposes of his judgment, he applied the tender rates to this measurement of labour to produce a figure for the total cost of the labour expended up to the date when the plaintiffs ceased work. This calculation was set out in a document produced by him which was before the judge at volume 7, page 145 C.

In his judgment the judge quoted a sentence from a judgment of Ackner LJ (as he then was) in C & P Haulage Ltd v. Middleton [1983] 1 WLR 1461 at 1467:

"It is not the function of the Courts where there is a breach of contract knowingly, as this would be the case, to put the Plaintiff in a better financial position than if the contract had been properly performed."

At page 210 of the transcript of his judgment, the judge said:

"Respectfully adopting the dictum of Ackner LJ, which I have quoted, I do not see why the Plaintiffs should be put in a better position in the evaluation of the claim on a quantum meruit than if the contract had been fully performed. I consider, therefore, that there is no good reason why the Plaintiffs should recover more than their necessary expenditure on materials and plant at invoiced rates, including trade and settlement discounts, or that the labour value of the work done should be based on rates different from those offered in Mr Newton's letter of 8th April 1981, which discounted the labour rates contained in the Bills of Quantity by 5%. The contract between the parties was based on the fact that Mr Newton intended the Plaintiff's overheads to be covered and the profit to be earned on the quoted labour charge."

The judge then said that the result of following this basis was set out in Mr Humphries' calculations at page 145 C. However, it is apparent that a typing error must have crept into two of the figures which then follow in his judgment. I propose to quote the passage with the figures taken directly from page 145 C. As so corrected the judge said:

"This approach to the valuation of the Plaintiffs' work up to 15th March 1982 is to be found in Mr Humphries' calculations at volume 7, page 145 C, where he values labour, including a small provision for plant, at £40,137.53 and materials, including plant cost of £6,390.08, at £39,305.38. These calculations are based on labour charges at tender rates, by which he means the rates contained in the Bills of Quantities less 5%, materials at invoice prices, including trade discounts, and plant at tender rates."

Later the judge said expressly that he accepted Mr Humphries' valuation of the labour element of the work up to 15th March 1982 based on his remeasurement of the work required to be done. He then said:

"I have come to the conclusion that the fair way of evaluating the Plaintiffs' claim on a quantum meruit is on the basis of Mr Humphries' calculations set out in volume 7 at page 145 C based on his remeasurement. This means that in broad terms the Plaintiffs will recover the labour value of their work plus an allowance for overheads and profit on this element and a sum which represents the net value of materials and plant reasonably needed to carry out the work done up to 15th March 1982. This includes the net value of materials left on site which Mr Humphries considered were necessary for the completion of the work. I accept his evidence about this. This conclusion reflects Mr Humphries' remeasurement of the works done and does not, therefore, precisely match my findings as to the cost of plant and materials properly charged to the Defendants in the invoices rendered up to the time when work on site came to an end, which is the essential basis of Schedules 1 and 2. The reason is, of course, that those findings were made in the context of the contractual terms and I am now concerned with the question of what is a fair remuneration for the Plaintiffs on a quantum meruit."

In the end the judge took the final sum shown in Mr Humphries' calculation on page 145 C of £83,475.87, deducted from it £2,050.45 in respect of items for which he had found that the plaintiffs were not entitled to charge extra, making a resulting sum of £81,425.42. Against this the defendants had paid on account £59,779.83, leaving a balance of £21,645.59.

Mr Lamb's argument is that in principle, on acceptance by an innocent party of the repudiation of a contract by the other party, the contract is discharged for the future. The innocent party still has such rights as have already accrued to him, but for any other loss his right is to sue for damages. He is not entitled in law to abandon the contract and sue on a quantum meruit.

It follows, Mr Lamb submits, that in this case the plaintiffs' only right under the contract was to be paid the amounts shown in invoices 22 and 23. Any other payment due to them at 15th March 1982 was irrecoverable under the contract since invoices for such amounts had not then been delivered. Such sums could in law be claimed as damages, but not on a quantum meruit. Since the plaintiffs have not claimed damages, it follows that the judge adopted the wrong basis for quantifying their claim.

I comment that if Mr Lamb is correct, this is really no more than a pleading point. It amounts to saying that on the judge's findings the plaintiffs could recover the amount of the judge's award partly on invoices 22 and 23 and the balance as damages, but they cannot recover on a quantum meruit.

Mr Lamb's submission is based on what he puts forward as the result of modern authorities as to the rights of an innocent party on the repudiation of a contract. This is most conveniently seen by comparing two editions of Keating on Building Contracts. In the third edition, published in 1978, the learned author said at page 152:

"Where the contract work has been partly carried out and the contract is brought to an end by the employer's repudiation, the contractor has the option of either suing for damages, when the measure of damages is normally the loss of profit on the unfinished balance, plus the value of the work done at contract prices, or of ignoring the contract and claiming a reasonable price for work and labour done on a quantum meruit. Thus a contractor who is losing money on an unprofitable contract may find himself able to recoup his losses by electing to claim a reasonable price."

One of the authorities quoted by Mr Keating for the proposition that the innocent party is entitled to claim on a quantum meruit is Lodder and Another v. Slowey [1904] AC 442, a decision of the Judicial Committee of the Privy Council on an appeal from the Court of Appeal of New Zealand. In a single sentence at the end of the judgment of the Committee, at page 453, Lord Davey said:

"Their Lordships also agree with the learned judges as to the proper measure of damages, or (more accurately) as to the right of the respondent to treat the contract as at an end and sue for work and labour done instead of suing for damages for breach of the contract."

In the current fourth edition of Keating on Building Contracts, the learned editor, Sir Anthony May, takes a different view. At page 207 he says:

"Where the contract work has been partly carried out and the contract is brought to an end by the employer's repudiation, the contractor is entitled to be paid the value of the work done at contract prices, and to claim in addition damages, the measure of which is normally the loss of profit on the unfinished balance."

Later, on the same page, the learned editor quotes a passage from the judgment of Dixon J in McDonald v. Dennys Lascelles Ltd [1933] 48 CLR 457 at 476:

When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract ... is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach."

This passage was approved and adopted by Lord Wilberforce in Johnson and Another v. Agnew [1980] AC 367 at 396 and by Lord Brandon in Bank of Boston Connecticut v. European Grain and Shipping Ltd [1989] AC 1056 at 1098.

Sir Anthony May comments:

"Thus if, when a contractor accepts an employer's repudiation, instalments have become due under the contract, they remain payable. The contractor may additionally be entitled to payments at contractual rates for work done but not covered by the instalments. If the contract does not provide for instalments, the contractor is entitled to payment at contractual rates for all the work done. It is thought that this applies in principle also where there is an entire contract with a single undivided lump sum, although the court will have to make an assessment of the proportion of the lump sum which represents the contractual value of the work done. In each instance, the contractor is additionally entitled to damages.

It is thought that the contractor does not have an option, as an alternative to the claim outlined above, of ignoring the contract and claiming a reasonable price for the work and labour done on a quantum meruit. There is authority to the effect that he does have such an option, and this has not uncommonly in the past been taken to be the law. It is now thought however that the alternative claim cannot stand in the face of the logic of the House of Lords authority referred to above. If it were the law, it could result in substantial injustice if a contractor who was losing money heavily on a contract became entitled to payment for the past work on a more favourable basis than the contract provided and when his losses were not caused by the employer's breach."

Mr Lamb has cited to us the authorities both for and against his proposition, apart from those to which I have referred, upon which the respective views set out in the quotation above are based.

I think, however, that it is not necessary for us to seek to resolve the problem posed in the recent edition of Keating on Building Contracts. I say this because I do not accept that in the present case the judge has done what Mr Lamb criticises him for doing. The judge has not held that the plaintiff was entitled to sue on a quantum meruit without any reference to the contract. On the contrary, he has done exactly what Sir Anthony May suggests in the passage above is correct in principle where there is "an entire contract with a single undivided lump sum". The judge has based his award on the contract price for materials, together with a division of the lump sum for labour on the basis of a measurement of the amount of work done applied to the rate on which the tendered total sum for labour was based. This approach, adopted by Mr Humphries -- to measure the amount of work, to calculate from that the amount of labour in hours and then to apply it to what were, in effect, the contract rates for labour -- is, in my view, a perfectly proper approach. Moreover I note, as I have already said, that the judge ensured that the total he awarded did not exceed the contract prices plus the cost of extras (the actual sum exceeded the contract sum because of the extras). In my judgment, the judge's approach was sensible, correct and justified in law. Although I realise that he, himself, thought that he was departing from the contract and awarding a sum based purely on the quantum meruit, his reasoning makes it clear that what he was seeking to do was to base an award upon the contract rates for labour, and thus to do what the recent authorities permitted him to do. On the other hand, if it was proper to describe the award as being based on a quantum meruit as the judge did, then it was a quantum meruit of the most limited kind, circumscribed by the application of the tender rate for labour and by the obligation not to exceed the total contract price.

Despite Mr Lamb's able argument, I find nothing in the recent authorities that compels me to the conclusion that the judge has in any way acted on a wrong principle or adopted an incorrect basis for his award.

I would therefore dismiss this appeal.

I agree that this appeal should be dismissed for the reasons given by Lord Glidewell. I wish only to refer to the argument advanced for the appellant that as the result of more modern authority the rights of a party to a contract who has accepted a wrongful repudiation are limited in the manner suggested by the learned editor of the 4th Edition of Keating on Building Contracts in the passages quoted by Glidewell LJ. Accepting that as Dixon J said in McDonald and Another v. Dennys Lascelles Limited (1933) 48 CLR 477:

"... when a contract ... is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach"

It is necessary to consider the case in which the employer undertakes to pay a lump sum on completion of the work and repudiates the agreement before the contractor has had the opportunity to complete the work. The employer's obligation is executory. The contractor is absolved from performing the work which remains to be completed and has a remedy for the employer's breach of contract. The question for the court is what is the nature of that remedy and what is the fair way to compensate the contractor. This is not necessarily deduced from an example in which payment for work done while the contract was in existence at a more favourable rate than the contract provided for, would overcompensate a contractor who was losing money heavily on the contract and saddle the employer with losses which were not caused by the employer's breach. The other side of the coin is whether it is just to permit a party in breach of contract to retain the benefit of work carried out by a contractor who has quoted a price on the assumption that he will have the opportunity of completing the whole of the work. In such a case it could well be that valuing the work performed pro rata at the contract rate may unjustly enrich the employer at the expense of the contractor. This would not be the case where priced bills of quantities formed part of the contract, but the agreement in the present case clearly illustrates the point. The official referee found that the invoices rendered by the plaintiffs for work done were not and were not intended by the parties to be equivalent to work certified as having been done. They were simply stage payments which would be set against the lump sum at the end of the contract. From the correspondence and conversations leading up to the agreement of the lump sum for labour, it was based upon an estimate made by Mr Newton of the cost of carrying out the work contained in a bill of quantities which did not form part of the agreement. That figure was after negotiation reduced, as the judge found, by 5% overall.

It must therefore be questionable whether a straight line apportionment of the labour charges to the work actually performed would adequately compensate the plaintiff in the present case. At the moment of breach he may have been showing a loss on his labour charges but it does not follow that he would have been unable to diminish those losses, to break even or to make a profit had he been afforded the opportunity of completing the remainder of the work. Many contingencies would have to have been taken into account to determine the question. In short, the contractor may have been deprived of compensation for his losses on the swings by future takings on the roundabouts. I see no fairness in permitting an employer who has negotiated a lump sum price on the basis that he will pay promptly sums stated in invoices delivered and who received an appreciable discount in return but who then repudiates the agreement by refusing to perform his side of the bargain, thereafter to rely on the very term which he has refused to perform.

The competing arguments were considered by Mr J Beatson in his first essay on the Law of Restitution (The Use and Abuse of Unjust Enrichment), Clarendon Press, 1991. As he points out at page 14:

"... prorating can be very difficult, as in a complex construction contract. Even if it is not difficult it can simply be unfair. Taking the example given above of a contrat to pave eight miles of road, it does not follow that the contractor would have agreed to do lesser distances at a prorated price. His fixed costs would be the same and there are economies of scale. These may well justify a quantum meruit larger than a proration of the price."

In the present case it may well be that the official referee was more generous to the defendant in assessing the labour value of the work done at a rate which discounted the labour rates used by Mr Newton in the bills of quantity by 5%. The discount given by Mr Newton was for prompt payment of sums intended to be invoiced in ten equal parts of the lump sum which the defendant promised to pay promptly. To hold the plaintiffs to the discounted figure when the defendant had prematurely determined the contract by wrongfully breaking its promise allows the defendants to retain a benefit which in justice I do not think they ought to have. I mention the point simply as an illustration that there may be cases in which a contractor ought to be allowed to claim for work done before repudiation of the contract by the employer on a basis other than that agreed for a pro rata apportionment of the whole of the work.

For the reasons already given by Glidewell LJ, the question does not arise on the method of assessment adopted in the judgment of the official referee in the present case.

I agree that the appeal should be dismissed for the reasons given by Glidewell LJ, and I wish to add a few words of my own only on the value added tax aspect of the matter.

The learned judge found that the defendants agreed to pay the plaintiffs the actual cost of materials bought by the plaintiffs which were reasonably necessary for the construction of the building. The simple concept of a purchase at cost was complicated by the fact that value added tax was payable upon the supply of the materials to the plaintiffs, but was not payable upon their supply by the plaintiffs to the defendants. If everything had gone as planned, the plaintiffs would have been registered for value added tax purposes from the outset, and would have been entitled to recover from the Commissioners of Customs and Excise the amount of the tax paid by them, either by claiming a repayment or by crediting it against other value added tax payable by them. Because of the strike by Customs and Excise officials in the summer of 1981 there was a delay in the registration of the plaintiffs. Accordingly they were temporarily unable to reclaim the value added tax paid by them. It was against that background that the plaintiffs asked the defendants to "pay the VAT until such time as repayments are made": see judgment of the learned judge at page 121 of the bundle.

As a result, so long as the temporary arrangement was in force, the defendants paid the plaintiffs the full cost of the materials inclusive of VAT, instead of the cost exclusive of VAT which would have ruled had the plaintiffs been registered. Had matters developed as originally envisaged, the plaintiffs should have reclaimed the VAT when the strike was over and accounted for it to the defendants. In the event, the plaintiffs did not do so, but the defendants reimbursed themselves by crediting the tax which they had paid against their own VAT liability. Consequently, by the time the matter came to trial the net result was exactly as it would have been if the plaintiffs had been registered from the outset.

At page 122 of the bundle the learned judge records Mr Marcos as having said that the defendant might have acted illegally in crediting the VAT against their own liability and might have to repay this sum to the Customs and Excise. Mr Lamb was unable, however, to point to any provision in the VAT legislation which would enable the Customs and Excise to make such a claim at this late stage. Even if it were open to them to do so, I find it unlikely in the extreme that the Commissioners of Customs and Excise would seek to take such a technical and unmeritorious point, let alone to do so successfully. They have lost no tax by reason of what occurred. All that has happened is that the credit which was due for the tax paid on the original supply of the materials has been obtained by the defendants, who actually paid that tax.

It follow that, as between the defendants and the plaintiffs, the defendants are unable to establish that they are actually or potentially out of pocket by reason of their payment of the VAT. Even if the defendants claim had been properly pleaded (which it was not) the learned judge would have been quite right to reject it as he did.