England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON
COUNTY COURT
(HIS HONOUR JUDGE COWELL)

		Royal Courts of Justice Strand, London, WC2A 2LL Wednesday 11th July 2001

LADY JUSTICE ARDEN:

1. This is appeal by Mr Omar with the permission of Robert Walker LJ against the order dated 9 June 2000 of His Honour Judge Cowell sitting in the Central London County Court. So far as material, this order dismissed the Mr Omar's claim for the return of his deposit on the purchase of a house from the respondent, Mr El-Wakil, and ordered him (Mr Omar) to pay 90% of the costs. The order which Mr Omar seeks is judgment in the action for £110,000 plus interest and an order for costs against Mr El-Wakil.
2. The judge made his order following a nine-day trial. At trial there was a second defendant, Mr Ramadan. The judge dismissed the claim against him and there is no appeal against that order. I can therefore disregard the position of Mr Ramadan.
3. The action arose out of two agreements both dated 22 January 1992. By the first agreement ("the business transfer agreement") Mr Omar and his two companies ("the companies"), Park West (Car Hire) Limited ("Park West") and Courier Associates Limited ("Courier Associates"), sold the business of Park West Cars and various fixtures and fittings to Visionhurst Limited ("Visionhurst"), a company controlled by Mr El-Wakil, for the price of £110,000. The business transfer agreement was silent as to how the price was to be paid but contained a covenant to enter into the second agreement which was indeed scheduled. The second agreement was an agreement for the purchase of a house which I describe below. The business transfer agreement also provided that Mr Omar (who was the beneficial owner of 87 Bell Street, London N W 1, from which address the Park West and Courier Associates traded) should grant Visionhurst a lease of 87 Bell Street. The judge found that this lease was never granted: the property was mortgaged and the first mortgagee took possession. The completion date was stated to be 21 January 1992 and it appears that Visionhurst started trading as Park West Cars from 87 Bell Street the following day. The business transfer agreement also provided that the parties should indemnify each other against pre- and post-completion date debts respectively. The business was not a success and in due course Visionhurst was wound up. Moreover, in the period following completion, the judge found that Mr El-Wakil was forced for purely commercial reasons to pay a large number of debts owed by Mr Omar to suppliers despite the provisions of the business transfer agreement. Park West was also wound up and Courier Associates was dissolved by the registrar of companies. Mr El-Wakil was not a party to the business transfer agreement.
4. By the second agreement ("the Corringham contract"), Mr El-Wakil sold to Mr Omar a property known as 11 Corringham Road, London N W 11 ("the property"). The date of the Corringham contract is 22 January 1992, and the parties were Mr El-Wakil and Mr Omar. The companies were not parties. The price was stated to be a £350,000 of which £110,000 was to be paid on signing the contract and the balance on completion. The property was subject to a tenancy agreement with Citibank N.A., and it was a condition of the Corringham contract that Mr El-Wakil should pay Mr Omar a monthly sum equivalent to the monthly rental income (£2,400) less the mortgage interest instalments payable by Mr El Wakil to his own mortgagee, Mortgage Services Limited.
5. The Corringham contract provided that the date of completion should be the 22 April 1992 or fourteen days after the date on which the purchaser notified the vendor that he was ready to complete "whichever shall be later". Mr El Wakil served a notice to complete on 22 April 1992 but this was disputed by the appellant. In due course Mr Omar served notices to complete. When Mr El Wakil failed to complete in accordance with the Mr Omar's notices to complete Mr Omar brought this action to recover damages for breach of the Corringham contract in the amount of the deposit of £110,000, alternatively repayment of the deposit, and in addition an account of profits of the business.
6. The judge held that the Corringham contract should be rectified by substituting "earlier" for "later" in the clause providing for the date for completion. There is no appeal from that part of the judge's order. The judge also held Mr El-Wakil was probably not ready and able to complete on 22 April 1992 and that the Corringham contract should be rescinded.
7. The Corringham contract provided for a deposit of £110,000 but did not state how this was to be paid. Mr Omar alleged that it was agreed that Mr El-Wakil would accept the transfer of the appellant's business under the business transfer agreement. In his defence Mr El-Wakil averred that the sale of the business represented the deposit paid by Mr Omar to him in respect of the sale of the business. By paragraph 4.2 of his defence, Mr El-Wakil averred that "on a date prior to the agreement in the second agreement, Mr Omar and Mr El-Wakil orally agreed that the deposit payable to Mr El-Wakil under the Corringham contract would be applied to the purchase under" the business transfer agreement. Mr El-Wakil defended the action on the basis that Mr Omar never paid the remainder of the purchase price for the property and on the basis that Mr Omar had been in breach of contract in that he had failed to pay outstanding mortgage instalments due to Mortgage Services Limited. Mr El-Wakil had paid Mr Omar the sum of £7,870, comprising as to £2,690 rent for 87 Bell Street and as to the balance of £4,800 rental for the months of February and March 1992 received from Citibank N.A. Mr Omar failed to apply the sum of £4,800 as agreed and Mr El-Wakil was awarded judgment on his counterclaim. (There is no appeal against that part of the judge's order.) Mr El-Wakil also claimed that the business transfer agreement was induced by false representations as to the turnover of the business and other matters, but this claim was abandoned before the trial started. Mr Omar asserted among other things that any right to sue for damages for misrepresentation vested in Visionhurst.
8. On 22 April and 7 August 1992, Mr El-Wakil served notices to complete but Mr Omar refused to comply with these because he contended (wrongly on the judge's findings) that the time for completion had not yet arrived. It is to be noted that in a completion statement produced in September 1992 Mr El-Wakil claimed that the outstanding balance of the purchase price was £240,000. There was then a dispute between the parties as to whether the amounts due in respect of the Mr Omar's alleged breaches of contract under the business transfer agreement could be required to be paid on completion. The judge decided to make no finding as to whether Mr El-Wakil was entitled to make these deductions. Subject to that dispute, none of the contemporaneous correspondence alleged that the amount of the deposit of £110,000 on the purchase of the house was still due or that the purchase price of the business had not been paid.
9. On 20 August Mr Omar served notice to complete but he was unable to complete so completion did not take place. He served a further notice to complete on 16 September 1992. Completion did not take place. It is not clear why completion did not take place save (on the judge's finding) that Mr Omar was unable to complete. Proceedings were issued in March 1993.
10. At the trial reliance was placed on the correspondence between Mr El-Wakil and his former solicitor, Mrs Brown. By letter dated 21 January 1992 Mrs Brown advised Mr El-Wakil that he would have to find the difference between the proceeds of sale and the amount due on redemption of his mortgage before completion and that if he failed to do so would be liable to return to Mr Omar "his £110,000". This correspondence is not admissible on the question of the interpretation of the Corringham contract and I have not taken this correspondence into account for that purpose.
11. The judge found that all material times Mr Omar was in an appalling financial condition and that he was willing to enter into any transaction to provide himself with immediate cash. He found that Mr El-Wakil intended to redeem his mortgage out of the proceeds of the sale. However at a late stage in the trial, as a result of late disclosure by Mr El-Wakil's former solicitor of a conveyancing file, it was discovered that the redemption monies required exceeded the proceeds of sale.
12. The judge gave a preliminary judgment on the facts on 26 May 2000. He held that Mr Omar was a totally unreliable witness and that he preferred Mr El-Wakil's evidence on any point on which the parties' evidence differed.
13. After dealing with the claim for rectification the judge went on to deal with the question whether any part of the deposit should be returned. He took into account that the lease of 87 Bell Street was never granted and that many difficulties were experienced by Mr El-Wakil and his business partner (Mr Ramadan) and that these were caused by Mr Omar. He noted that the £4,800 had not been paid as agreed and reserved the question whether this factor should be ignored if the deposit was not returned.
14. The judge went on to hold that because the amount of the proceeds of sale would be less than the amount Mr El-Wakil required to redeem his mortgage "it is very difficult to determine without more information" whether Mr El-Wakil could have completed the Corringham contract on 22 April 1992. However he was satisfied that Mr Omar was at all stages in 1992 unable to complete. The judge was also satisfied that at no stage was Mr Omar ready to pay the balance of the price.
15. In his reserved judgment dated 9 June 2000 the judge held that no deposit was paid under the Corringham contract. He held that it was necessary to analyse the two transactions separately. The assets sold under the business transfer agreement were assets of the companies and Mr Omar was unjustly enriched at the expense of the companies, unless Mr Omar paid £110,000 to them. He further held that by not paying £110,000 to the companies, Mr El Wakil was also unjustly enriched at the expense of the companies. To order Mr Wakil to pay £110,000 to Mr Omar would cause Mr Omar to be unjustly enriched, though, he added, "still at the companies' expense", and would not remedy "the injustice of the enrichment" which the companies had suffered. There remained a risk of action by the companies. Furthermore, the Corringham contract was not performed and Mr Omar had no cause to say that he must be repaid by Mr El-Wakil a sum which he did not in fact pay to him. Moreover if the companies had sued Visionhurst or Mr El-Wakil, damages for breach of the business transfer agreement could have been offset. Essentially the deposit money was that of the companies. Restitution should involve no more than the transfer back to the companies of the assets transferred under the business transfer agreement. There should be no order for repayment of the deposit because Mr Omar could not say that he had paid £110,000 to Mr El-Wakil or that by taking the two contracts together he must be treated as having done so.

The appellant's arguments

16. Mr Hill-Smith, for Mr Omar, contends that the judge should have found that Mr Omar paid a deposit of £110,000 for the property and that the judge should have ordered this amount to be repaid by Mr El-Wakil to Mr Omar. He submits that the repayment of the deposit was not on the judge's findings a question of discretion. He submits that Mr Omar agreed to procure Park West and Courier Associates to transfer the business to Visionhurst, that Visionhurst then notionally paid £110,000 to the companies and Mr Omar and that Mr Omar then notionally paid this sum to Mr El-Wakil. He submits that but for the interposition of the companies the position would be plain and that the intervention of the companies did not alter the position. If Visionhurst had any claim under the business transfer agreement, it had to pursue its claim separately under that agreement. The fact that the transfer of business may have been procured by Mr Omar in breach of his duties to the companies did not affect the validity of the transfer. The existence of a breach of duty could not afford a defence to Mr El-Wakil. He relies upon the averments in the defence referred to above, and the further averment in paragraph 16 of the defence that the consideration for the sale of the business was provided to Mr Omar's knowledge by Mr El-Wakil, "being the £110,000 stated to be part of the purchase price to be paid" by Mr Omar under the Corringham contract. Mr Hill-Smith further relies on statements made by Mr El-El-Wakil in his evidence at trial that the consideration for the business would be part payment towards the purchase price of the property and that it had been agreed between the parties that Mr Omar would pay £350,000 and that the price of the business would be the consideration for the deposit on the house. The business was bought in the name of a company which was purchased "off-the-shelf" for that purpose.

The respondent's submissions

17. Mr Russell for the respondent has two main submissions. First he submits that the claim for return of the deposit could only ever be a restitutionary claim and that since Mr Omar had paid nothing he could recover nothing. Second, and in the alternative, he submits the court had a discretion as to whether to order repayment of the deposit. The judge had exercised his discretion not to do so in a way that was not susceptible to review.
18. Mr Russell submits that a key finding of the judge is that the assets sold under the business transfer agreement were all assets of the companies. I note that this submission leaves on one side Mr Omar's promise to execute a lease and to indemnify Visionhurst against debts which arose prior to completion.
19. Mr Russell points out that under the business transfer agreement non-monetary assets were transferred whereas Mr Omar's claim for repayment of the deposit is a claim to be paid in cash. He submits that the claimant should not be entitled to recover that which he did not provide.
20. Mr Russell submits that the only claim in this situation by a person who has provided goods or services is a claim for damages. On the facts of this case, on Mr Russell's submission, it is clear that Mr Omar has lost nothing since the assets had been provided by the company.
21. Alternatively, the matter was a question for the judge's discretion and the judge was correct in the way that he exercised his discretion.
22. Finally Mr Russell submits that because Mr Omar served his own notice to complete after Mr El-Wakil served his notice, Mr Omar affirmed the contract and accordingly it was not correct to say, as the judge was minded to hold, that Mr El-Wakil had effectively repudiated the contract: the repudiation was simply not accepted by Mr Omar.

Conclusions

23. In order to put the matter on one side, I would observe at the outset that the transactions constituted by the business transfer agreement and the Corringham contract may have involved breaches of duty by the directors of the companies. The judge made a clear finding of fact that the assets of "Park West Cars" belonged to the companies. On the face of it the companies were transferring assets for the benefit of their shareholders without receiving any consideration. Mr Hill-Smith submits that that is not necessarily so since the Mr Omar may have been a substantial creditor of Park West and Courier Associates and the amount of the debt due to him might have been reduced or discharged following the business transfer agreement. There was no evidence of that at trial. However that may be, if there are claims for breach of duty they vested in the respective companies and were exerciseable by the creditors collectively through the medium of liquidation. Likewise I do not consider that, if Mr Omar has a claim against Mr El-Wakil, he should be deprived of that claim unless he proposes to compensate the companies. In this, I differ from the judge. In other words, while not approving of any breach of duty by the directors of the companies, I put the question of such breaches on one side for the purposes of considering the claim made to repayment of the deposit.
24. The first question is whether any deposit was paid under the Corringham contract. The judge answered this question in the negative by analysing the consequences of each transaction taken separately. That approach assumes that the transactions were separate, whereas a major issue on the facts of this case is whether the transactions were in reality parts of a single arrangement so far as Mr Omar and Mr El-Wakil were concerned. Accordingly, in my judgment the question whether a deposit was paid must be analysed differently. As I see it, it is best approached as a mixed question of fact and law. Did the parties act on the basis that a deposit was paid, and if so was that payment sufficient in law to constitute the payment of a deposit for the purposes of the Corringham contract? In examining the factual issues it must be borne in mind that the deposit did not have to be paid in cash. The parties could agree ( even if the Corringham contract did not so provide) that the deposit should be paid in kind, rather than cash.
25. In my judgment, on the facts as found by the judge, it is clear that Mr Omar and Mr Wakil regarded the two transactions as interconnected and part of a single transaction so far as they were concerned. The two agreements were executed on the same date and the business transfer agreement imposed an obligation on the parties to execute the Corringham contract. The price payable under the former and the deposit payable under the latter are identical in amount. Although the business transfer agreement does not provide for the price to be set against the deposit or make any similar provision it is clear that the parties considered that the deposit was paid by the transfer under the business transfer agreement. Indeed when Mr El-Wakil served his completion statement in September 1992, it was prepared on the basis that only the balance of the purchase price remained to be paid.
26. Was the deposit paid in money or in money's worth? Mr Hill-Smith submits that the deposit was paid in cash, that is that there was a notional payment of cash from Visionhurst to Mr Omar and the companies, and a notional payment of cash by Mr Omar to Mr El-Wakil. In my judgment this approach is artificial, and possibly designed to avoid the conclusion that the deposit was received only in money's worth and any unwanted consequences that might be thought to follow. I doubt very much whether Mr Omar and Mr El-Wakil would have intended there to be notional payments of cash. It is more likely that they would have regarded the transfer of assets as discharging the obligation to pay the deposit. This is quite possible since Mr El-Wakil could agree to accept as payment a transfer of value to Visionhurst and there would be an immediate benefit to him in terms of an increase in value of his shares. Neither Visionhurst or the companies are parties to these proceedings so there are no findings (or no findings which could bind them) as to the contractual position as between Visionhurst and Mr Omar and the companies. However it is at least a possibility that the companies waived any right to receive payment of the price from Visionhurst in the light of the fact that Mr El-Wakil was prepared to accept the transfer of assets to Visionhurst as payment of the deposit. If Mr Omar receives any repayment of the deposit it may be his duty as a director of the companies to account for it to them (if in existence or revived). The scenario that the companies are deprived of the price without their consent as the judge assumed is not the only possible course of events.
27. This interpretation does not of course mean that Visionhurst would not be able to bring proceedings against Mr Omar and the companies for breach of the business transfer agreement, though Visionhurst would need to be joined in the proceedings for this purpose. However that may be, looking at the transaction from Mr El-Wakil's point of view, he was at the outset at least prepared to accept the transfer of assets to Visionhurst as satisfying the deposit, and moreover he was prepared to place a value of £110,000 upon that transfer for that purpose. Accordingly in my judgment the conclusion which the judge should have drawn was that the obligation to pay the deposit had indeed been discharged.
28. The Corringham contract incorporates with modifications the National Conditions of Sale (20^th edition) with modifications. Clause 22 of these Conditions as so modified provides:

"(1) At any time on or after the completion date, either party, being ready and willing to fulfil his outstanding obligations under the contract, may …give to the other party notice in writing requiring completion in conformity with this condition.

(2) Upon service of such notice…it shall become a term of the contract, in respect of which time shall be of the essence thereof, that the party to whom the notice is given shall complete the contract within 10 working days …

(3) In case the purchaser refuses or fails to complete in conformity with this condition, then…the purchaser's deposit shall be forfeited…"

29. On the judge's findings Mr Omar was not entitled to serve notice under this condition and accordingly any notice served by him must be of no effect. It seems likely on the evidence that the judge found that Mr El-Wakil was unable to serve such a notice. The contractual provision for forfeiture of the deposit does not therefore operate. However the condition is silent on the fate of the deposit in circumstances other than those stated in the condition. In those circumstances, in my judgment, the general law applies. There is no question now of the Corringham contract being performed as Mr Omar has sued for return of his deposit and Mr El-Wakil has resisted any suggestion that Mr Omar was able to perform the contract.
30. In my judgment, contrary to Mr Russell's submission, it is not open to Mr Omar to claim damages for breach of the Corringham contract because on the judge's findings he has repudiated that contract by serving notices to complete when he was not ready to complete. In his counterclaim, Mr El-Wakil claimed that he was thereby entitled to rescind the Corringham contract and retain the deposit, thereby accepting (if he had not done so already) Mr Omar's repudiation. The consequence of the acceptance of such repudiation was that Mr El-Wakil could claim damages for breach of contract (see The Mihalis Angelos [1971] 1 QB 164), but Mr Omar could not do so. If Mr El-Wakil had also repudiated the contract at an earlier stage by serving notice to complete when he was not able to complete, Mr Omar did not accept this repudiation since he proceeded to serve his own notice to complete thereafter. Even if he had repudiated the Corringham contract, Mr El-Wakil was entitled to rely on Mr Omar's later repudiation (see Fercometal SARL v Mediterranean Shipping Co SA [1989] AC 786; Segap Garages Ltd v Gulf Oil (Great Britain) Ltd, Times 24 October 1988 CA). Mr Omar could not raise as a defence Mr El-Wakil's inability to perform the Corringham contract (Braithwaite v Foreign Hardwood Co Ltd) [1905] 2KB 543, 551, 554).
31. Neither party contends that the "deposit" was not a deposit but a part payment of the price due under the Corringham contract. In that case, a claim in restitution for money had for money had and received might have been available (see generally Dies v British and International Finance Corporation [1939] 1KB 724). Nor has either party argued that the deposit was a form of penalty. Accordingly the prima facie position is that the deposit belongs to Mr El-Wakil because, in the normal way, where a contract provides for the payment of a deposit it is taken to belong to the other party to the contract if the party paying the deposit defaults in performance of the contract: see for example Howe v Smith (1884) 27 Ch, D 89, 97-8.
32. However, section 49(2) of the Law of Property Act 1925 makes special provision for the return of deposits paid under contracts for the sale or exchange of land. This provides:

"(2) Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit."

33. We have not been taken to any authorities which consider the width of the court's jurisdiction under this section and none appear in the judgement of the judge. However I note that in Universal Corporation v Five Ways Properties Limited [1979] AER 552, Buckley LJ stated that he preferred the view that:

"the jurisdiction is one to be exercised where the justice of case requires. In this connection I take the word "justice" to be used in a wide sense, indicating that repayment must be ordered in any circumstances which make this the fairest course between the two parties."

Buckley LJ considered that it was relevant that in that case condition 22 of the National Conditions did not confer on the vendor an unqualified right to forfeit the deposit because it included the words "(unless the court otherwise directs)". However the other member of the court, Eveleigh LJ, did not express a view on the width of the court's jurisdiction and as the case was an interlocutory appeal heard by two lords justices that decision is not binding on this court.

34. The absence of criteria guiding the exercise of the court's jurisdiction has been criticised (see Goff and Jones, Law of Restitution (5th edition) (1998) page 535). The learned editors of that work express the view that "there is much to be said for the view that the principles which determine which penalty payments are recoverable should guide the courts in the exercise at their discretion, namely the court should consider restitution of the whole or part of the deposit if the sum forfeited is out of all proportion to the vendor's loss arising from the purchaser's repudiation." A different view is expressed in Jones and Goodhart, Specific Performance, 2^nd ed. (1996) page 305, which states that there is much to be said for the generous interpretation by Buckley LJ of the language of section 49((2). That interpretation was also welcomed by Charles Harpum in Relief against Forfeiture and The Purchase of Land, (1984) CLJ 134, 172. The extent of the court's jurisdiction under this section has not been a subject of argument in this court. However in my judgment, however wide the jurisdiction, it should not in the circumstances of this case be exercised in favour of the appellant.
35. The starting point must be that although section 49(2) is expressed in open-textured terms leaving it to the courts to determine the organising principles, the court must bear in mind that the payment in question was a "deposit", that is an earnest for performance and that accordingly there should not be relief simply because the Corringham contract never took place. The meaning of "fairness" (see per Buckley LJ above) in any given situation is context-specific, as Lord Hoffmann pointed out in O'Neill v Phillips [1999] 2 BCLC 1 (a very different type of case):

"Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others ('it's not cricket') it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important."

The context here is of a conveyancing transaction It is common knowledge that if a purchaser pays a deposit he is likely to forfeit it if he does not fulfil the contract. Moreover deposits are very usual features of conveyancing transactions and conveyancing transactions are common. It is important that there should be certainty attaching to the consequences of paying a deposit.

36. As the judge did not exercise his discretion under section 49(2), or alterntively declined to exercise it on the basis no deposit had been paid, it is open to this court to do so. For the reasons given, I would start from the position that the deposit should not normally be ordered to be repaid. Are there any mitigating circumstances in the present case? It can be said on Mr Omar's behalf that he transferred or caused the companies to transfer assets of value at Mr El-Wakil's direction. Moreover the deposit paid was substantially in excess of the normal deposit. The sum of £110,000 represented about 31% of the total purchase price rather than the usual 10%. It can also be said that if there are any claims against Mr Omar neither Visionhurst nor Mr El-Wakil has proceeded with them. They may never be proved. Repayment of the deposit would not prevent Visionhurst from beginning proceedings if it wished to do so. Moreover Mr El-Wakil has not produced any evidence that he has suffered loss as a result of non-completion of the Corringham contract. He may resell the property at a profit. Furthermore, Mr El-Wakil was probably not on the judge's findings able to complete the contract when he served notice to complete. Finally Mr El-Wakil took possession of the assets transferred to Visionhurst.
37. The answers to these points are in my judgment as follows. Mr Omar entered into this transaction conscious that he was paying a deposit and he must be taken to have known either actually or through his advisers that certain consequences would follow if he failed to complete the contract or was unable to do so. It is correct that he caused assets of some value to be transferred to Visionhurst, but he never granted the lease which he promised of 87 Bell Street. This, as the judge observed, was "the site of the goodwill" for the business. Moreover he failed to pay debts which he had agreed to pay under the business transfer agreement and which on the judge's findings Mr El-Wakil was accordingly forced to pay for him. The judge also found that Mr El-Wakil trusted Mr Omar and that his trust was misplaced. In sum, Mr Omar's conduct does not excite sympathy. The fact that Visionhurst can bring proceedings against Mr Omar and the companies under the Corringham contract does not assist Mr Omar since the existence of any such claims is outwith in the present proceedings. It is also irrelevant that Mr El-Wakil has not sought to establish that he has suffered any loss as a result of the abortive Corringham contract: the parties agreed that the £110,000 was a deposit. It would moreover be wrong for Mr El-Wakil to be ordered to pay cash when the deposit was not paid in cash. The deposit is abnormally large but there has been no suggestion that the court could direct payment of part only of the deposit. Furthermore in my judgment, in a situation where a purchaser could not himself perform, the circumstances which make it appropriate for the court to exercise its discretion under section 49(2) in his favour must be exceptional. Inability to complete is exactly the risk the deposit was intended to guard against. Accordingly I would not exercise the discretion conferred by section 49(2) in Mr Omar's favour and would dismiss the appeal on that point.
38. Counsel also made submissions on a further issue raised by the notice of appeal, namely, whether the judge erred in exercising his discretion as to costs. Among the matters which the judge had to take into account was the fact Mr El Wakil failed to disclose a conveyancing file until the seventh day of the trial. As a result of that late disclosure the action undoubtedly took a different course. Mr Hill-Smith argues that the judge failed to take this sufficiently into account In effect the consequences of Mr El-Wakil's non-disclosure were visited on Mr Omar. Nor did the judge take proper account of the fact that the counterclaim had been withdrawn.
39. In my judgment in judge's exercise of discretion on costs cannot set aside by the Court. He was fully familiar with the case. The judge began his judgment with the memorable sentence: "This in many ways has been an appalling case for everyone involved". The size of any deduction from the costs which Mr Omar as losing party should pay was a matter within his discretion. He is not shown to have applied any incorrect principle. Accordingly, while in no way approving of Mr El-Wakil's failure to make proper disclosure, I would dismiss Mr Omar's appeal on this point as well.

LORD JUSTICE PILL:

40. I agree with the conclusion of Arden LJ that the claim should be approached on the basis that the deposit of £110,000 had been paid by the claimant. That being so, it is contended on behalf of the claimant that, in the situation which arose, he had a legal right to the return of what is acknowledged to be a deposit without needing to resort to the provisions of section 49(2) of the Law of Property Act 1925 ("the 1925 Act"). I approach this question, as has Arden LJ, on the basis that the judge held, and was entitled to hold, that the vendor was not entitled to serve a notice under Clause 22 of the National Conditions of Sale (20^th edition) and that the express contractual provision for forfeiture of the deposit does not operate.
41. In Country and Metropolitan Homes Surrey Ltd v Topclaim Ltd [1996] Ch 307, Mr Timothy Lloyd QC, sitting as a deputy high court judge, considered the effect of a special condition in a contract for the sale of land which purported to exclude the operation of that sub-section. Mr Lloyd stated:

"The contract does not alter the ordinary position at law, namely that the fate of the deposit, in a situation in which the contract is not completed, depends on which party's fault it is that the contract is not completed."

42. Mr Lloyd cited with approval the statement of Mr Gerald Godfrey QC sitting as a deputy high court judge in Dimsdale Developments (South East) Ltd v De Haan (1983) 47 P & CR 1. Mr Godfrey stated, at p 11:

"It is to be observed that a purchaser had no need to pray this sub-section [section 49(2)] in aid when it is not he but the vendor who is the defaulter. The sub-section is needed only to enable a purchaser who is himself in default to recover his deposit."

43. Judge Cowell held that neither party was in a position to complete the Corringham contract. The defendant was unable to redeem the mortgage he had granted over the property. The claimant was unable to pay £240,000, the balance of the purchase price. That being so the judge concluded:

"Given that neither party could complete or make time of the essence of the contract, neither party could treat the other as having repudiated the contract … Had anything been paid pursuant to the contract it would have had to be returned."

44. The judge rejected the pleaded case of the claimant which was that the defendant having repudiated the agreement the claimant was entitled to and did accept the repudiation. The deposit was claimed as damages upon an alleged repudiation by the vendor. Rescission was not claimed by the purchaser. The vendor claimed the right to rescind in the body of his pleading but not in the prayer where damages were claimed. The judge went on to hold that if, as now found by this Court, the deposit of £110,000 was paid pursuant to the contract, it was returnable to the claimant. I read the judge's statement as finding a legal right to the return and not as exercising the discretion conferred by section 49(2) of the 1925 Act.
45. In In re Scott and Alvarez's Contract [1895] 2 Ch 603 a purchaser sought to recover a deposit he had paid on a contract for the sale of land in circumstances where there was a defect in title. The court declined to order specific performance of the contract but, under the contractual terms, there was no breach of contract by the vendor. Lindley LJ stated, at p 612:

"There is no breach of contract at all; you have taken your chance with respect to your deposit; and unless you show a breach by the vendor of his bargain, you are not entitled to have that deposit back."

46. That statement of principle reflects the earlier decisions of this Court in Ex parte Barrell In re Parnell (1875) 10 Ch App 512 and Howe v Smith (1884) 27 Ch D 89. In both cases, only the purchaser was in default. In ex parte Barrell, James LJ stated "the money was paid to the vendor as a guarantee that the contract should be performed". Mellish LJ stated: "it appears to me clear that, even where there is no clause in the contract as to the forfeiture of the deposit, if the purchaser repudiates the contract he cannot have back the money, as the contract has gone off through his default". In Howe, the vendor was held entitled to rescind the contract and at the same time to retain the deposit. Bowen LJ stated, at p 99, that the purchaser "has so dealt with his bargain as to give the vendor a right to allege, if he chooses so to say, that the contract is at an end, that the purchaser has receded from his bargain, and that the deposit money is liable to be retained by the vendor". Fry LJ stated, a p 102, that "in the event of the purchaser making default the money is to be forfeited", and at p 105 that "there has been such default as justifies the vendor in treating the contract as rescinded". Cotton LJ, at p 95 cited with approval the words of James LJ in Ex parte Barrell already cited.
47. In Cole v Rose [1978] 3 All ER 1121, it was held by Mr Mervyn Davies QC, sitting as a Deputy High Court Judge, that a purchaser of land was entitled to the return of the deposit but in that case the vendors had rescinded the contract. The vendors failed under the contractual provision for forfeiture of the deposit because their notice was ineffective but it was also held that they were not entitled to retain the deposit by virtue of their rights and remedies at law or in equity because, at the time they rescinded, the purchaser had not been guilty of an unreasonably long delay in completing. (The judge added that the purchaser would not on the facts have succeeded under section 49(2) of the 1925 Act.)
48. The cases cited deal with analogous situations in which the return of a deposit is in issue in contracts for the sale of land but we have not been referred to a case such as the present in which each party claims that the other had repudiated and the judge has held that neither party could complete, both were in default and neither could treat the other as having repudiated. If the vendor alone is in default, the deposit is recoverable. The reasoning in Howe v Smith strongly supports a conclusion that a purchaser in default cannot recover his deposit but was a case in which the vendor was entitled to and did rescind. The cases cited do not cover the situation in which both parties are unable to complete and each claims damages upon an alleged repudiation.
49. In my judgment, the principle that the deposit was paid as a security for the performance of the contract by the claimant should prevail on the present facts. The legal right to return is based on default by the vendor and there was such a default. However on the present facts, the deposit was paid on the understanding that the availability of the right to recover required the existence of an ability and willingness on the part of the purchaser to complete. The deposit being paid as a guarantee that the contract should be performed, the purchaser in default cannot assert a right to return on the ground that the vendor was also in default. It follows that I agree with the conclusion of Arden LJ and disagree with the judge's conclusion that the claimant has a legal right to the return of the deposit.
50. The claimant cannot recover as of right. He has to rely on section 49(2) and I also agree with Arden LJ that the discretion of the Court should not be exercised in his favour.
51. I agree that the appeal, including the appeal as to costs, should be dismissed.

Lord Phillips MR:

52. I agree that this appeal must be dismissed for the reasons advanced by Arden L.J. and Pill L.J. rather than those of the Judge.

"Where a sum of money is paid under a contract, and the contract is not completed, the right of the payer to claim the return of the money depends on the construction of the particular terms of the contract."

Chitty on Contracts 28^th Ed Volume 1 30-059, and authorities there cited.

53. The contract in the present case made express provision for the circumstances in which the deposit was to be repayable:

"(1) At any time on or after the completion date, either party, being ready and willing to fulfil his outstanding obligations under the contract, may… give to the other party notice in writing requiring completion in conformity with this condition.

(2) Upon service of such notice… it shall become a term of the contract, in respect of which time shall be of the essence thereof, that the party to whom the notice is given shall complete the contract within 10 working days….

(3) In case the purchaser refuses or fails to complete in conformity with this condition, then… the purchaser's deposit shall be forfeited…."

54. The first ground upon which the appellant sought recovery of the deposit was that he had satisfied these conditions. Had he done so he would have had a legal right to the return of the deposit. The Judge held that he had not done so inasmuch as he was never 'ready and willing to fulfil his outstanding obligations under the contract'.
55. In consequence, the appellant was driven to rely on his alternative ground for claiming relief, the provisions of Section 49(2) of the Law of Property Act 1925. Success on that ground depended upon the exercise by the Court of its discretion in favour of the appellant. For the reasons given by Arden L.J. I do not consider that the Court should exercise its discretion in his favour.
ORDER:
56. Appeal dismissed.
57. Appellant to pay one third of Respondent's costs.
58. Respondent's costs of the appeal to be subject to public funding detailed assessment.
59. Leave to appeal to the House of Lords refused.
60. Service of above order upon appellant's solicitors to be deemed to be good service upon the appellant's.
(Order does not form part of approved Judgment)