24 October 2014 #Dispute Resolution
The case of Sugar Hut Group v AJ Insurance put an interesting slant on the question of how loss of profits should be calculated.
A nightclub in Essex was damaged by a serious fire. Its owner (Sugar Hut) failed in its claim under its insurance policy because its insurance brokers (AJ Insurance) had negligently failed to make certain required disclosures, rendering the policy void. In turn, Sugar Hut sued the brokers. The brokers admitted that they were liable for 65% of Sugar Hut’s losses and the parties agreed what should be paid for the cost of the fire damage to the property and wasted costs of the original unsuccessful claim against the insurers.
What left to be determined by the Court was the cost of the interruption to Sugar Hut’s business during the 49 weeks when the Club was unusable. The claimant’s expert put this figure at £1,345,794, whereas the defendant’s expert valued the loss at £385,776. So far, so predictable.
What made the proceedings rather more unusual was the ‘TOWIE effect’. The reopened nightclub featured very heavily on the reality TV programme The Only Way Is Essex, which coincidentally first aired at the same time that the club reopened. Mr Justice Eder candidly admitted that he had ‘not had the benefit of seeing this TV show’ but accepted that it had a very significant impact on the makeup of the club’s clientele. On the one hand, the club had become a tourist destination in its own right and attracted many new customers who would want the chance to spot TOWIE cast members. This led to higher overall turnover than previously. On the other, the club’s original clientele, referred to by the Judge as ‘big spenders’, stopped attending almost entirely. The net result was a higher numbers of customers attending the club than prior to the fire but with a significantly lower spend per head.
The Court needed to decide whether the loss of revenue during the period of closure should be calculated with reference to turnover before the fire, the increased turnover after the fire, the rise in the Consumer Price Index (CPI) or a combination of all of these. There were several complicating factors. When reopened, the Club was larger in size than previously and had the benefit of various improvements, although this process was already underway before the fire. It was also argued that the nightclub industry in general had suffered during the period of the closure.
Sugar Hut’s expert’s view was that the anticipated turnover during the period of closure should be the average of the trading periods both before and after the fire. In other words, the calculation of damages should include reference to the post TOWIE, higher turnover. The broker’s expert’s opinion was that predicted turnover should be calculated solely with reference to the volume of business pre-fire, albeit with an uplift for CPI.
As is often the case, the Judge’s decision fell somewhere in the middle. He held that the turnover would have increased by more than CPI (by 20%) from the pre-fire figures, due to the improvement process that was already underway. However, he rejected the claim for a further uplift based on the TOWIE era. The refurbishments following the fire were so extensive that what reopened was effectively an entirely new club. Although many of the previous members no longer came to the Club, this was outweighed by the overall benefit of the TOWIE effect. Indeed, the Judge noted that the Club’s owners allowed it to continue to feature on TOWIE, notwithstanding the alleged detrimental effect on its clientele. As the TOWIE effect had no relevance to the lost business during the fire, the turnover following the Club’s reopening should be disregarded for the purposes of calculating damages.
Aside from the ‘celebrity’ interest, the case is noteworthy of the difficulties that can be encountered when claiming loss of profits. The Court must consider a multitude of competing factors and the Judge acknowledged that even his final decision was ‘necessarily somewhat crude and inexact’.