England and Wales Court of Appeal (Civil Division) Decisions

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

		Royal Courts of Justice Strand London, WC2
		12th October 2006

1. LORD JUSTICE CARNWATH: This appeal raises a short point on the construction of an agreement to sell a property in North End Road by an agreement dated 8 April 2005 for the sum of £3.15 million. The contractual completion date was 20 May 2005, but in the event the contract was not completed until 31 May 2005. We are concerned with the consequences of the delay between 23 May and 31 May. The amount at stake is not large, some £10,000, but for whatever reason the opponents have decided to pursue the matter to this court and they have been given permission to do so.
2. The question, in essence, is whether during that period the appellants were "in default" in the terms of standard clause 7.3 of the contract, so as to make them liable to compensation for the delay. At the heart of the dispute is clause 12 of the agreement, which concerns the question of VAT. Happily, the complexities of the VAT code do not concern us, but the purpose of the clause was to ensure that the sale would be treated for VAT purposes as the transfer of a business as a going concern; the consequence of that being that the vendors would not be accountable for VAT on the purchase price and VAT would not therefore have to be added to the price payable by the purchasers. The VAT would have been substantial, over £500,000.
3. The relevant parts of clause 12 are as follows:

"The seller and buyer intend that VATA Section 49 and the Value Added Tax (Special Provision) Order 1995 [Article 5] … (relating to the transfer of the business as a going concern) shall apply to the transfer of the property rental business carried on by the Seller in relation to the Property ("the Business") and, accordingly: …

"b) the buyer (or transferee if different) shall, upon completion, warrant that it is registered for the purposes of Value Added Tax legislation and it has elected to waive the exemption of the VAT in respect of the Property and has notified HM Customs and Excise prior to Completion on such election and that it intends to carry on the same kind of business as carried on by the Seller as at completion ...

"e) the Seller and the Buyer shall use all reasonable endeavours to secure … pursuant to provisions of VATA and the VAT (Special Provisions) Order 1995 referred to above the transfer of the Property under the terms of this Agreement is deemed to be the transfer of a business as a going concern for the purposes of legislation relating to value added tax …

"f) if pursuant to the termination given by HM Customs and Excise any VAT shall be payable on the sale under this Agreement the Buyer shall (if production of tax invoices in respect are the same) pay to the Seller such VAT and any penalty or interest incurred by the Seller for late payment for such VAT."

4. The problem was that by the completion date, 20 May, the purchasers had begun the process of securing VAT registration but that had not been completed. They were therefore unable truthfully to give the warranty required by 12(b) and they were not, in the event, able to do so until 31 May 2005. Unfortunately, the contract did not say in terms what was to happen in that event. What did happen was that the sensible course was taken of delaying the sale until 31 May so that the purchasers could in effect put their tackle in order. However, no agreement was reached that such delay would be treated as default for the purpose of clause 7.3.
5. There was an order for trial of three preliminary issues. The first relating to the terms of a letter of 12 May does not concern us. The second and third were as follows:

"2) Whether the [appellant] was able to give the warranty required under clause 12(b) of the contract on the contractual date of completion.

"3) Whether the [respondents] were entitled to delay completion of the sale until the appellant was registered for the purpose of Value Added Tax."

6. HHJ Cowell answered those questions no and yes. Having decided that no other triable issue remained to be determined, he gave final judgment in favour of the respondents for a sum amounting to just under £10,000 plus interest.
7. Point (2) arose from what seems to me a slightly surprising contention in the defence, that the defendant was able to give the warranty under 12(b) regardless of its actual position at the date of completion. The judge regarded that as untenable, and so do I. If they were unable to give a truthful warranty, the contention they could have given an untruthful warranty and so complied with 12(b) is absurd, and I say no more about it.
8. So I turn to the third point, which is a narrow issue of construction. I think that is the matter on which Laws LJ probably intended to give permission and at first sight it is not entirely easy. Mr Stephens' point for the purchasers is relatively simple. This contract contained very specific provisions for allocating risk in respect of VAT. In the provisions I have referred to the purchaser undertook to use its best endeavours to ensure the VAT would not be payable, but if it was not successful in that it undertook to bear the cost of VAT; so the vendor was protected. Whatever the precise effect of the warranty provision in 12(b), it did not say anything about delaying completion. As I understand it, Mr Stephens accepts that, if the vendor had insisted on completion on 20 March and left the purchasers with a claim for £500,000 of VAT, they would have had no complaint, though he suggests that in practice VAT might not have been payable. But having acquiesced in the delay to enable that to be avoided, the vendor cannot point to any default by the purchaser under the contract.
9. The judge rejected that contention. He took what I may describe as a pragmatic commercial view of the matter. At paragraphs 10 and 11 he said this:

"I think it is important to make this observation at the outset, that it seems to me that the Defendant's argument rested entirely on the proposition … of warranty [sic] in this case, or the word 'warranty', must have been used in the sense mentioned in Chitty on Contracts, 29^th edition, … paragraph 12-031, which the editors of Chitty themselves described as "its most technical sense," as meaning a term of contract, the breach of which may give rise to a claim for damages, but not to a right to treat the contract as repudiated.

"So I ask the question - I hope rhetorically - why should the word 'warranty' be confined to that technical meaning? It seems to me there is no reason at all for confining it. It was used in the sense of contractual obligation or promise that something would be done, in this case a warranty that the Defendant was in fact registered - before another undertaking or promise - in this case, the transfer of property would be performed. I would go on to say that maybe upon a breach of that warranty, if it had been persisted in, the vendor would have been entitled to say that the contract had been repudiated by the purchaser and to treat it as a breach of condition, using 'condition' in the technical sense. But it is sufficient for me to say, as I do, and I so decide, that this was quite simply a condition precedent to completion, and nonetheless so by reason of the use of the word 'warranty' which incidentally in many older cases was used in the technical sense of 'condition precedent' as is apparent in footnote 121 in the same page of Chitty. So I think it is wholly disingenuous to latch onto the word 'warranty' as used in contract and give it this highly technical meaning."

10. He went on to deal with the suggestion that such an approach was inconsistent with his specific provisions in (e) and (f). He said this at paragraph 12:

"It seems to me that the commercial sense of it in the light of the legislation is that it was absolutely essential if the payment of VAT was to be avoided that at the outset the Defendant should in fact have been registered by the time of completion. That would not absolutely guarantee that no VAT would be payable, for there were other matters such as the business being a going concern which the VAT authorities might wish to check, but it was at any rate essential for a start that the defendant should be so registered for, without that, VAT would undoubtedly be payable. With that crucial starting point in mind it becomes apparent when one reaches paragraphs (e) and (f) that those paragraphs are the provisions which lead to a Determination by the Customs and Excise to the effect that the business was a going concern at the time of … transfer, and that is what those paragraphs (e) and (f) are about."

11. As Mr Stewart Smith has pointed out, even if the registration conditions were satisfied there were other matters which the VAT authorities would need to be satisfied about in order to ensure that VAT was avoided. He suggests that (e) and (f), as the judge said, were really dealing with those matters.
12. It is a very short point but I think that the judge was, in essence, right. I would not, myself, be too concerned about the use of the word "warranty" as compared to "condition". It seems to me that Mr Stewart Smith is right that where one has a contractual term which relates to something which the purchaser has got to do before completion, the natural implication is that if it does not do it then it is not in a position to complete on the relevant date. It is true that clause 12(b) does not in terms say that it is a condition precedent, but implicit in the promise to warrant that the buyer was registered for VAT, in my view, was a promise that it would be in a position to give such a warranty.
13. Mr Stephens said that this was no different to a warranty on the sale of a car that the car is free from rust. The difference, as I see it, is that in that case the question of whether the car is free from rust is something which may need independent checking; it is not something which depend, on the action of the purchaser. In such a case, as I have said, the purchaser who gives such a promise also impliedly promises that he will be in a position to deliver on that promise. Since it is clear that on the due date he was not in a position to deliver on that promise, the vendor was entitled to delay completion until he was and to be compensated for the default.
14. As far as concerns the other clauses (e and f), I think Mr Stewart Smith is right to say that they were in essence longstops, and did not detract from the basic requirement.
15. For those reasons, I think on the main point the judge was correct and I would dismiss the grounds of appeal relating to that.
16. There is a further ground of appeal relating to what the judge did having reached that view. It is suggested that he should not have gone on to decide the other issues and should have duly adjourned the matter for further argument. There were, in summary, two issues. The first was whether a notice had been given under condition 7.3.4 for interest to run by a letter of 20 May sent by the vendor. It was suggested that that letter was equivocal, in that it did not in terms refer to 7.3.4 and did not in terms deal with the period beyond 23 May. The judge rejected that point and I would agree with him; there was nothing in it.
17. The other point on its face was rather more complicated relating to the tender of payment by the purchaser on 27 May. There were some exchanges at that time about whether what they were doing was sufficient to comply with the vendor's requirements. The judge accepted that there were arguable points on the facts, but he concluded that even taking all those facts at their highest from the purchaser's point of view, there was nothing in the point. Before us Mr Stephens has suggested that the judge was unfair to have dealt with it in that way, but he has not in terms criticised the judge's reasoning or indicated with any specificity what issues there were still to be argued about. It seems to me that the judge was entirely within his case management powers under CPR part 3 to take the course he did. I would dismiss this ground also.
18. In those circumstances the appeal, in my view, should fail.
19. LORD JUSTICE GAGE: I agree.
20. MR JUSTICE BODEY: This particular contractual term required a warranty or assurance to be given that a given state of affairs would exist at a given time in the future. That state of affairs turned out to be impossible of achievement by that given time, and so the purchaser could not honestly and accurately give that required assurance. The vendors could have waived the obligation of the purchaser to do so and could have completed, relying of the indemnity clause if VAT were later levied on the transaction; but the vendors were clearly not bound to waive it, since the relevant clause (clause 12(b)) was of obvious value to them. It followed that completion had to be delayed until the purchaser could give an accurate assurance, ie until the VAT registration was factually in place. Such delay was not the fault of the vendors. It arose essentially from the fact that the purchaser bound itself contractually in respect of something which was out of its control to achieve.
21. In my judgment, therefore, the learned judge was right in his construction of the contractual term and I, too, would dismiss the appeal.

Order: Appeal dismissed.