England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM GLOUCESTER COUNTY COURT
(Mr Recorder Greenwood)

		Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 20 November 2001

LORD JUSTICE CHADWICK :

1. This is an appeal against an order made on 20 September 2000 by Mr Recorder Greenwood, sitting in the Gloucester County Court, in proceedings brought by Mr Lionel Jones and his brother, Mr Clifford Jones, as purchasers under a contract for the sale of land and buildings at Marians Plantation, Coleford, Gloucestershire, against Forest Fencing Limited, the vendor under that contract.
2. The land and buildings which were the subject of the contract had been used by the vendor as a sawmill. The purchasers' claim in the proceedings was for damages for breach of contract, arising from the removal by the vendor, between contract and completion, of what is described in the statement of claim as "a substantial part of the electrical infrastructure" at the site – that is to say, the electrical distribution equipment comprising wiring, isolators, distribution panels and the mains supply transformer as far back as the supplier's connection point. The vendor counterclaimed for an order that it be entitled to enter the property and remove treatment tanks which had been left there on completion; with a claim, in the alternative, for the value of those tanks.
3. The judge held in favour of the purchasers. He ordered the vendor to pay damages in the sum £21,168.86 with interest amounting to a further £1,095.78 – that is to say, an amount of £22,264.38 in all. He dismissed the vendor's counterclaim. He granted permission to appeal against his order.
4. The contract was made on 4 September 1998 by exchange under the Law Society's formula 'B'. The purchase price was £360,000. Completion was fixed for 30 September 1998, or earlier by arrangement. The contract incorporated the Law Society's Standard Conditions of Sale (Third Edition). Standard condition 5.1.1. required the seller to transfer the property in the same physical state as it was at the date of the contract, fair wear and tear excepted. Standard condition 9.3 provided that the ownership of any chattels to be sold passed to the buyer on actual completion.
5. The standard conditions were made subject to the special conditions set out in the contract. Special conditions 8 and 9 were in these terms:

"8. In order to satisfy the requirements of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 it is hereby agreed between the parties hereto that there shall be incorporated into this Agreement the further terms and conditions (if any) expressly agreed and set out in the written correspondence between the parties Solicitors relating to this transaction.

9. The Buyer hereby confirms that he has inspected the property and has entered into this Agreement on the basis of such inspection and not in reliance on any representation warranty or statement written or implied made or (sic) by or on behalf of the Seller other than such as has have (sic) been given by the Seller's Solicitors in any written replies to enquiries made by or on behalf of the Buyer and this Clause shall remain in effect notwithstanding an assurance of the property."

6. The purpose of a condition such as that included as special condition 8 in the contract of 4 September 1998 is to overcome the problem that terms and conditions expressly agreed and set out in pre-contract correspondence between the parties' solicitors will, or may well, give rise to a position in which the requirements as to form introduced in relation to contracts for the sale of land by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 are not satisfied. The section provides (so far as material) that:

"(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.

(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract."

7. Where parties are in negotiation for the sale and purchase of land pre-contract correspondence between their respective solicitors is likely to be expressed to be "subject to contract." But, where those negotiations give rise to an exchange of contractual documents, that condition is fulfilled. A question which may then arise is whether terms and conditions set out and agreed in pre-contract correspondence between solicitors – but which have not been included in the contractual documents exchanged – are terms of the contract. Such terms and conditions may be excluded from the contract between the parties by an "entire agreement" clause in the documents signed and exchanged. But, in the absence of an entire agreement clause – and absent a condition such as that included as special condition 8 in the present case – there is a risk that the existence of terms agreed in pre-contract correspondence which have not been set out, again and in full, in the documents signed for the purpose of exchange will lead to the result that there will be no single document - or, where there is an exchange of documents, no single document and its counterpart – signed by or on behalf each party to the contract which incorporates all the terms which the parties have agreed. Special condition 8, in conjunction with section 2(2) of the 1989 Act, is intended to avoid that result.
8. A condition such as special condition 9 serves a related purpose. It seeks to provide an answer, by way of estoppel, to a claim that the purchaser was induced to enter into the contract by any representation, warranty or statement made by or on behalf of the vendor other than such as may be contained in the written replies of the vendor's solicitor to pre-contract enquiries. The position, therefore, is that a representation made on behalf of the vendor by his solicitor in answer to pre-contract enquiries may found a claim to rescission, or to damages under the Misrepresentation Act 1967; but representations made outside that context are not to found such claims. Warranties or contractual terms expressed in written replies to pre-contract enquiries will become incorporated in the contract by virtue of special condition 8 – because a solicitor's written replies to pre-contract enquiries will form part of "the written correspondence between the parties Solicitors relating to this transaction" – but other warranties or contractual statements, not made in inter-solicitor correspondence, are excluded.
9. In a case such as the present – where the contract includes conditions such as those in special conditions 8 and 9 - it is relevant, therefore, to have regard to the written replies made by the vendor's solicitors to pre-contract enquiries raised by the purchasers' solicitors on 5 August 1998. Those enquiries included a request "if appropriate" to supply "an inventory detailing any items to be left at the property and included in the purchase price". The reply, in a document dated 2 September 1998 signed by the vendor's solicitors, was in these terms:

"On completion the site will merely comprise the land and empty buildings. There will be no fixtures and fittings as such remaining. Please see the Agent's Memorandum of Sale concerning the removal of the sawmill equipment and the treatment of the electrical apparatus and wiring. The treatment tanks are also to be removed."

10. The "Agent's Memorandum of Sale" to which that reply refers is a document prepared by Humberts, the agents acting in the transaction on behalf of the vendor, and dated 31 July 1998. The document bears the heading "Memorandum of Proposed Sale and Purchase". Under that heading there are the words "Subject to Contract". There follows a description of the property, particulars of the vendor and its solicitors, particulars of the purchasers and their solicitors, and the price. In a section headed "Remarks and Conditions" there are these paragraphs:

"The Vendors have confirmed that the sawmill equipment will be removed and that electrical apparatus will be taken out by qualified electricians and wiring taken out back to the first isolator all as agreed and discussed.

The Vendors are agreed (sic) to remove the treatment tanks."

11. The judge found that Humberts' memorandum of 31 July 1998 followed a meeting between Mr Lionel Jones and Mr A N Champion FRICS, a partner in that firm, at Humberts' Worcester office on 28 July 1998. Amongst the matters raised by Mr Jones at that meeting was the vendor's intention in relation to the electrical equipment at the site. Mr Jones, in the light of previous experience in the purchase of factory premises, was concerned to establish what electrical equipment was to be removed, and what was to be left. Mr Champion took instructions from his client. In the light of those instructions he wrote to Mr Jones on 29 July 1998 in these terms:

"Further to our conversations of yesterday, may I confirm advice I have received back from my Client as follows:

1. Electricity – the sawmill equipment will be removed. The Vendors confirm that tail wires would be taken out back to the first isolator and such work would be carried out by qualified electricians."

12. Completion of the contract took place on 30 September 1998. Prior to completion the vendor removed the machinery within the sawmill and (in so far as that machinery was powered by electricity) the tail wires connecting each machine to its own immediate isolator or "trip". The purchasers make no complaint of that. But the vendor also removed other electrical equipment. The judge described the position at paragraph 30 in the first section of his judgment:

"It is difficult to be precise as to what the Defendants had removed prior to completion, but it appears that effectively they had removed the high voltage transformer and electricity meters for the site, together with a considerable proportion of the electric wiring, isolators and distribution panels. The building housing the transformer was empty as the transformer and switch gear had all been removed and the main 11,000 volt supply cable had been sawn through. All the electricity meters had been removed by MEB when they removed the transformer. The distribution panels, secondary distribution panels, emergency lighting and wiring, the majority of the electrical wiring and circuitry, all isolators and the yard lights had been taken. Effectively, the electrical equipment had been removed back as far as the entrance to the site."

It is said that that was in breach of the obligation, under standard condition 5.1.1, to transfer the property in the same physical state as it was at the date of the contract. On the other hand, the vendor did not, as it was required and entitled to do, remove the treatment tanks before completion. The purchasers have, since completion, refused access for that purpose.

The purchasers' claim

13. The judge directed himself (at paragraph 2 of the section of his judgment headed "Liability") that:

"By virtue of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 agreement for the removal of the saw mill equipment and treatment tanks cannot be incorporated as terms of the contract."

But he went on to hold (at paragraph 3 of that section) that:

"The requirements of Section 2 of the 1989 Act can be fulfilled by parties reaching an oral understanding at a time when all terms are subject to contract, and on the basis that when the main contract is signed by the parties, the collateral contract with its agreed terms comes into operation. In other words, the whole of the agreed terms mature into a binding contract when the main contract is signed."

He expressed the view that support for the latter proposition could be found in the decision of His Honour Judge Paul Baker QC, sitting as a Judge of the High Court, in Record v Bell [1991] 1 WLR 853.

14. On the basis of those self-directions, the judge went on "to interpret the discussions and correspondence which constitute the collateral contract between the parties later incorporated into the formal contract of sale, and to reach a conclusion as to the terms of that collateral contract by interpreting the intentions of the parties". He expressed the view (at paragraph 8 of the section of his judgment headed "Terms of Collateral Contract") that the enquiry which Mr Champion had made of his client on 28 July 1998 "could only have been interpreted as seeking clarification that the wiring from the individual machinery in the saw mill would be taken back to the first isolator immediately available to each machine by way of disconnecting it from the power supply in the saw mill." His conclusion is set out at paragraph 15 of that section of his judgment:

"I, therefore, conclude that on the basis of the evidence a collateral contract was reached between the parties and embodied in the contract for sale that so far as electrical wiring and equipment was concerned, the Defendants would remove saw mill machinery and the wiring from it only so far as the first available isolator was concerned, and that this did not indicate that there would be wholesale stripping out of not only wiring but other electrical equipment right back to the entrance to the site."

15. I confess to some difficulty in following the judge's reasoning. I am not able to understand why he took the view that the effect of section 2 of the 1989 Act, in this case, was that "agreements for removal of the saw mill equipment and treatment tanks cannot be incorporated as terms of the contract." Nor can I understand why, if that proposition were correct (which, in my view, it is not), the requirements of section 2 of the Act can be avoided by treating an understanding between Mr Champion and Mr Lionel Jones (evidenced by Mr Champion's letter to Mr Jones of 29 July 1998) as a collateral contract "embodied in the contract of sale." Record v Bell [1991] 1 WLR 853 provides no support for that approach.
16. In Record v Bell contracts for the sale of a house were about to be exchanged at a time when office copy entries of the vendor's title at the Land Registry had not been supplied. It was agreed between the parties' solicitors that contracts would be exchanged on the basis of a warranty that office copies, when available, would show that the vendor was the registered proprietor. Office copy entries were supplied before completion was due, and the vendor's title was established. But, by way of defence to a summons for a summary order for specific performance, the purchaser contended that the contract for sale of the house failed to satisfy the requirements of section 2 of the 1989 Act. His Honour Judge Baker QC rejected that contention. He held, following the reasoning of this Court in De Lassalle v Guildford [1901] 2 KB 215, that the warranty was collateral to the contract for the sale of the house. The warranty was given in order to induce the purchaser to exchange contracts for the sale, but it was not a term of the sale. So the existence of the warranty did not lead to the conclusion that the requirements of section 2 of the 1989 Act were not satisfied in respect of the contract of sale.
17. That is not the position in the present case. The contract itself contains terms as to the physical state of the property sold. The starting point is standard condition 5.1.1: the vendor's obligation is to transfer the property in the same physical state as it was at the date of the contract. But that standard condition is subject to the special conditions. In particular, it is subject to any terms and conditions incorporated by virtue of special condition 8. It is clear, in my view, that one effect of special condition 8, in conjunction with the solicitor's reply to the relevant pre-contract enquiry, is to incorporate the Agents' Sale Memorandum. Section 2(2) of the 1989 Act allows the terms of sale which the parties have agreed to be incorporated in the documents which they have exchanged "either by being set out in [those documents] or by reference to some other document." The term as to the removal of sawmill equipment and the treatment of electrical apparatus and wiring contained in the memorandum of 31 July 1998 under "Remarks and Conditions" is incorporated by express reference in paragraph 1 of the Replies to Additional Enquiries; and the Replies (being part of the pre-contract correspondence between solicitors) are incorporated in the documents exchanged on 4 September 1998 by special condition 8. The effect, therefore, is that it was a term of the contract for the sale of the land and buildings into which the parties entered on 4 September 1998 that:

"On completion the site will merely comprise the land and empty buildings. There will be no fixtures and fittings as such remaining. [The sawmill equipment will be removed . . . electrical apparatus will be taken out by qualified electricians and wiring taken out back to the first isolator all as agreed and discussed.] The treatment tanks are also to be removed."

The sentence in parenthesis is taken from the Agents' Sale Memorandum and interpolated in the relevant reply to pre-contract enquiries.

18. On the basis that the contract made on 4 September 1998 contains the term which I have just set out, the first question, as it seems to me, is whether the words which I have emphasised – "all as agreed and discussed" – are to be treated as confirmation that the sentence of which they are part does completely and accurately record the agreement which has been reached as to the treatment of sawmill equipment, electrical apparatus and wiring (in which case, they add nothing to what has gone before); or whether those words should be treated as an attempt to incorporate some prior, but unidentified, agreement or understanding which goes beyond (and may be inconsistent with) the agreement recorded in the earlier part of the sentence. If the words "all as agreed and discussed" were properly to be regarded as an attempt to incorporate some prior but unidentified agreement or understanding, it would follow, necessarily as it seems to me, that the contract made on 4 September 1998 would disclose on its face (when the term set out above is read into it) that it did not contain all the terms which the parties had agreed; with the result that the requirements of section 2 of the 1989 Act would not be satisfied. Neither party advances that contention. Each seeks to rely on the contract. In order to rely on the contract each must accept, as it seems to me, that the words "all as agreed and discussed" are not to be treated as an attempt to incorporate some prior but unidentified agreement or understanding.
19. In this context it is important to appreciate that the words "all as agreed and discussed" cannot be relied upon as a means of incorporating into the contract of 4 September 1998 Mr Champion's letter of 29 July 1998 to Mr Lionel Jones, or Mr Champion's letter of 28 July 1998 to his client, or the discussions between Mr Champion and Mr Jones which preceded those letters. The reason is that section 2(2) of the 1989 Act permits incorporation into a document of terms which are not set out in that document only "by reference to some other document". The words "all as agreed and discussed" cannot be taken as a reference to some other document. The only way in which the link can be made from the Agents' Sale Memorandum to the letters of 28 and 29 July – and the preceding discussions – is by oral evidence as to what was "agreed and discussed". The fact that that oral evidence would or might be supported by the letters of 28 and 29 July is not to the point. Section 2 of the 1989 Act has as its obvious purpose the exclusion of oral evidence to establish the terms of a contract for the sale of land – see the Law Commission's Report, Transfer of Land: Formalities for Contracts for Sale etc. of Land (Law Com. No. 164) (1987) and the observations of this Court in United Bank of Kuwait plc v Sahib [1997] Ch 107 at pages 135 and 141.
20. In my view the proper course, in the present case, is to treat the words "all as agreed and discussed" – which appear in the Agents' Sale Memorandum of 31 July 1998 and which have become part of the term incorporated in the contract of 4 September 1998 – as confirmation that the sentence of which they are part does completely and accurately record the agreement which has been reached as to the treatment of sawmill equipment, electrical apparatus and wiring. There are, I think, at least three reasons why that is the appropriate course. First, that seems to me to be a natural and obvious meaning of the words in the context in which they are used. The purpose of the Agents' Sale Memorandum is to record the essential terms of sale that have been agreed, subject to contract; so that the parties and their respective solicitors can proceed to the next stage – exchange of contracts – on the basis of that memorandum. For the memorandum to record that the parties have reached agreement as to the treatment of sawmill equipment, electrical apparatus and wiring without also recording the terms of that agreement – leaving those terms to be ascertained by reference to some prior oral agreement or discussion – would be to promote uncertainty and to invite confusion. It is not to be assumed that the memorandum was intended to do other than fulfil its purpose. Second, if either party had taken the view that the memorandum was not an accurate record of the bargain which they had made, that party could have been expected to say so. There is nothing to suggest that either party thought, at the time, that the memorandum was not an accurate record of their bargain. The difficulty has arisen from the fact that the two parties did not interpret the record of their agreement in the same sense. Third, both parties have proceeded throughout on the basis that the contract of 4 September 1998 was binding upon them in law; and, for the reasons which I have sought to explain, that requires them to accept the premise that the words "all as agreed and discussed" add nothing to the earlier part of the sentence. Neither party has sought to contend on this appeal that those words do add anything to the earlier part of the sentence; and I do not think it would be right, in the absence of some compelling reason, to impose that construction upon them when to do so would have the effect of striking down the contract which they each seek to enforce.
21. I turn, therefore, to the next question: what meaning should be given to the words "the sawmill equipment will be removed . . . electrical apparatus will be taken out by qualified electricians and wiring taken out back to the first isolator" in the context of this agreement. It is important to keep in mind that evidence of earlier negotiation is not a proper basis upon which to answer that question – see the observations of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384H, 1385H, and of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913B. Failure to have regard to those observations led the judge into error in the present case. In effect, the judge asked himself what Mr Lionel Jones would have understood from the answer (in the letter of 29 July 1998) to the enquiry which he had raised with Mr Champion on the previous day; and then went on to hold that the words used by Humberts in their memorandum must be given a meaning which reflected that understanding. In the circumstances of this case it is easy to understand why the judge adopted that approach. But, in my view, that was not the correct approach. The correct approach is to ask what meaning should be given to the words used in the memorandum in the light of the circumstances known to the parties; but without regard to evidence of negotiation or of subjective intention.
22. Adopting that approach, the answer to the question "what meaning should be given to the words used in the memorandum" cannot, I think, be a matter of serious doubt. The electrical apparatus at the site plainly included the high voltage reduction transformer, switch gear, distribution panels and isolators and the other equipment to which the judge referred. It is equally clear that the memorandum confirms that that apparatus – as well as the machinery used in the sawmill – is to be taken out. It is impossible to confine the words "the sawmill equipment will be removed and . . . electrical apparatus will be taken out" to the machinery alone. And, if the electrical apparatus as well as the machinery is to be taken out, the words "the first isolator" in the context of the phrase "wiring taken out back to the first isolator" must mean the isolator on the supply side of the apparatus. It is not, I think, in dispute that the first isolator on the supply side of the high voltage reduction transformer and its associated switch gear was at the point of connection to the high voltage supply.
23. It follows that the purchasers were not entitled to succeed on their claim. I would allow the vendor's appeal against the order for payment.

The vendor's counterclaim

24. The vendor's claim was in respect of "the treatment tanks". That reflects the description, both in the Agent's Sale Memorandum and in the solicitors' reply to enquiries, of what - in addition to the sawmill equipment, electrical apparatus and wiring - was to be removed prior to completion. The judge described the position in paragraphs 4 and 5 of the section of his judgment headed "Counterclaim":

"4. The evidence is that the tanks in question are set in concrete and would have been extremely difficult to remove from the site by the Defendants. The Defendants attempted to expand on the description of treatment tanks given in their Counterclaim by suggesting that the overhead equipment was in fact the valuable element as opposed to the tanks themselves [which were] of very little actual value. This was certainly the evidence of Mr Timmis the Managing Director of the Defendants.

5. The Defendants further attempted to introduce evidence that the replacement value of the tanks would have been substantial and I disallowed this evidence, and also disallowed evidence of the value other than that specifically of the tanks set in the ground, on the basis that it had never been made clear that the Defendants sought to remove otherwise than the tanks themselves prior to the completion of the sale."

25. The judge accepted that the tanks, being set in concrete, were fixtures attached to the land; and so merged with the freehold on completion. I agree. The right reserved to the vendor by the agreement was a right to remove the treatment tanks prior to completion. There was no right to enter the land after completion and remove fixtures which had become part of the property transferred on completion.
26. I accept, also, that the judge was entitled to take the view that a claim by the vendor to the ancillary equipment above the tanks was a new claim, not raised in the pleaded case. The purchasers had not come to trial to meet that claim; and the judge was right to dismiss it.
27. It follows that I would dismiss the vendor's appeal on the counterclaim.

SIR MURRAY STUART SMITH:

28. I agree.
Order: Appeal against the order for payment allowed; appeal against order dismissing the counterclaim dismissed; claimant to have the costs of the appeal; order for costs below set aside; claimant to pay the defendant's costs of the claim and defendant to pay the claimant's costs of the counterclaim; order for a detailed assessment. (Order does not form part of the approved judgment)