ON APPEAL FROM THE HIGH COURT OF JUSTICE
His Honour Judge Purle QC
(Sitting as a High Court Judge)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE ETHERTON
LORD JUSTICE LEWISON
| ALEXEY SAMARENKO
||Claimant / Respondent
|- and -
|DAWN HILL HOUSE LIMITED
||Defendant / Appellant
MR JONATHAN SMALL QC & MR GREVILLE HEALEY(instructed by Boardmans, London) for the Appellant
Hearing date : 24 November 2011
Crown Copyright ©
Lord Justice Lewison :
i) Is a failure to pay a deposit on time under a contract for the sale of land necessarily a repudiatory breach of contract entitling the seller to terminate the contract;
ii) If the answer is no, was time successfully made of the essence of payment in this case with the consequence that, on the facts, the seller was entitled to terminate the contract?
"This Agreement becomes unconditional upon the Buyer obtaining the Planning Permission and the said relevant consent from the Wentworth Estate Roads Committee and within 60 working days from the date of the Planning Permission or within 60 working days from the sate of the said relevant consent from the Wentworth Estate Roads Committee, whichever is the later, the deposit of £500,000 shall be paid to the Seller's solicitors to be held as stakeholders in accordance with 2.2 of the Standard Conditions of Sale."
"2 For the purposes of clause 16 of the Contract, the Deposit to be paid shall be reduced to £450,000 and is now due to be paid to the Seller's solicitors on 3rd March 2011 (being 60 working days after the grant of the Original Permission).
3 For the purposes of clause 17 of the Contract, the sum of £4,050,000 shall be substituted for the sum of £4,500,000 and shall be paid to the Seller's Solicitors on 13th April 2011 …
4 In all other respects the Contract is confirmed and is now to be deemed to be unconditional."
"Our client is prepared to allow you 5 working days from today within which the pay the deposit, failing which our client will treat the contract with you as repudiated.
On behalf of our client we therefore demand payment of £450,000 to us in cleared funds by no later than 5 pm on Wednesday 16 March, 2011, as to which deadline time shall be of the essence."
"… there is an implied term of the contract for the purposes of business efficacy that your client will facilitate any reasonable requirements of our client towards achieving completion, as he has done hitherto."
i) Time was not of the essence of the contractual timetable for payment of the deposit;
ii) Although Mr Samarenko was entitled to serve notice making time of the essence of the revised deadline for payment of the deposit a failure to comply with that deadline did not necessarily amount to a repudiatory breach of contract;
iii) The time given by the letter of 9 March purporting to make time of the essence was too short in all the circumstances of the case.
"As to such a clause there is only one kind of breach possible, namely to be late, and the questions to be asked are: first what importance have the parties expressly ascribed to this consequence? And, second, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole?"
"It is by construing a contract (which can be done as soon as the contract is made) that one decides whether a term is, either expressly or by necessary implication, a condition, and not by considering the gravity of the breach of that term (which cannot be done until the breach is imminent or has occurred)."
"It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract."
"Everybody knows what a deposit is. The purchaser did not want legal advice to tell him that. The deposit serves two purposes—if the purchase is carried out it goes against the purchase-money—but its primary purpose is this, it is a guarantee that the purchaser means business…"
"If payment of a deposit was not a condition precedent to the obligation to grant the lease, it was at any rate, in my judgment, a term of so radical a nature that the defendant's failure to comply with it would entitle the plaintiff company to renounce further performance. The same argument on the character and importance of a deposit, which persuaded me on the first point that the clause was a condition precedent, goes far to show that if it is not such a condition, then it is at any rate a fundamental term in the sense that I have indicated."
"Here there is a specific time - 48 hours after signing the contract - and it seems to me that the deposit which is required to be paid is plainly in the nature of security, so that the seller should know where he stands when, as Mr. Chambers put it so elegantly, the buyer puts his money where his mouth is.
I therefore conclude that, certainly in a contract of this kind, the categorization of the payment as a deposit takes the case out of s. 10 (1) of the Sale of Goods Act, 1979, and that on a true construction of the contract, payment of the deposit in due time is of the essence of the contract. Indeed, if that were not so the sellers would not have the protection which they have stipulated for under the contract. For, if it was an innominate term, what then? I suppose the sellers would have to wait until the stipulated time for payment of the deposit had expired and then say: "You have not paid within that time, I now make time of the essence. And you must pay the deposit within . . ." say, 12 hours, or something of that kind. That message would have to go to the buyers, normally through the brokers. So further time would elapse in actually giving a notice making time of the essence; and all of this would, of course, be against a very tight time scale. Under the contract, within seven days of the notice of readiness the purchase price had to be paid. Now obviously the intention was that the deposit should be available well before the time came for actual delivery and payment of the purchase price. It seems to me quite plain that, in accordance with what I understand to be the ordinary effect of a requirement in a contract for payment of a deposit, the intention was that the payment of the deposit should be made within 48 hours, and if that was not done the seller would not have got the security for the buyers' performance to which he was entitled. And not having received that security for performance of the contract, he would be entitled to say "I can now call this transaction off and let my ship be sold elsewhere". So I hold that the construction of the contract for which the sellers contend is right."
"… the weight of authority is in favour of the view that a requirement in a contract for the sale of land that a deposit should be paid by the purchaser does not constitute a condition precedent, failure to fulfil which prevents the contract from coming into existence, but is in general to be taken as a fundamental term of the contract, breach of which entitles the vendor, if he so elects, to treat the contract as at an end and to sue for damages including the amount of the unpaid deposit."
"The next question is whether clause 5 of the option agreement in the present case is, in accordance with the general rule, to be regarded as a fundamental term of that agreement or whether, on the contrary, there is something which, as a matter of construction of that agreement, in the light of the surrounding circumstances, takes it out of the general rule. At first sight, it seems repugnant to hold that a term of the agreement which neither the plaintiffs nor the defendant, nor, obviously, their solicitors, gave any thought to at the time when the option came to be exercised, was a fundamental term of it. I do not think, however, that the state of mind of the parties or their advisers at that time is the test. The question has to be answered, I think, by reference to the terms of the document itself, considered in the light of the circumstances as they were when it was executed. By that test, I see nothing to take this case out of the general rule."
"There are no doubt cases of contracts where the mere failure to pay on time a sum due under the contract is sufficient to entitle the party to whom the payment should have been made to treat the contract as repudiated. But I think that it would be unnecessarily harsh to hold that that was so in a case of the present kind."
"Accordingly, I prefer the view of Warner J in Millichamp v Jones  1 WLR 1422 and hold that the provision for payment of the deposit was not a condition precedent to the formation of a contract. It was in my view a fundamental term of the contract. I entirely agree with the view of Goulding J in Myton Ltd. v Schwab-Morris  1 WLR 331, 337G (expressed on the alternative basis that he was wrong as to the condition precedent) that the provision for payment of the deposit was "a term of so radical a nature that the defendant's failure to comply with it would entitle the plaintiff to renounce further performance": see also Millichamp v Jones and Portaria Shipping Co v Gulf Pacific Navigation Co Ltd  2 Lloyd's Rep 180. The result, in my opinion, is that the provision for payment of the deposit was not a condition precedent to the formation of the contract but was a fundamental term of a concluded contract."
"Alternatively, if rescission is for any reason not possible, the term as to payment of the deposit having been incorporated in the contract so made and being a fundamental term, the dishonouring of the cheque will result in non-payment of the deposit on the exchange of contracts, entitling the vendor to bring the contract of sale to an end: this conclusion is, I consider, consistent with the approach of the Court of Appeal in Pollway Ltd v Abdullah  1 WLR 493."
"There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one's mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability."
"To say, time is regarded in this Court, as at law, is quite impossible. The case mentioned of a mortgage is very strong: an express contract under hand and seal. At law the mortgagee is under no obligation to re-convey at that particular day; and yet this Court says, that, though the money is not paid at the time stipulated, if paid with interest at the time a re-conveyance is demanded, there shall be a re-conveyance; upon this ground; that the contract is in this Court considered a mere loan of money, secured by a pledge of the estate. But that is a doctrine, upon which this Court acts against what is the prima facie import of the terms of the agreement itself; which does not import at law, that, once a mortgage, always a mortgage; but Equity says that; and the doctrine of this Court as to redemption does give countenance to that strong declaration of Lord Thurlow, that the agreement of the parties will not alter it; for I take it to be so in the case of a mortgage; that you shall not by special terms alter what this Court says are the special terms of that contract."
"At law, time is always of the essence of the contract."
"In my opinion, the time fixed by a contract for the payment of the balance of the purchase money and the completion of the contract was, according to the law as it stood before the Judicature Act, 1873, of the essence of the contract, so that non-payment on that day, provided it was not caused by the default of the vendor, authorised the vendor at law to treat the contract as rescinded."
"My Lords, in a contract for the sale and purchase of real estate, the time fixed by the parties for completion has at law always been regarded as essential. In other words, Courts of law have always held the parties to their bargain in this respect, with the result that if the vendor is unable to make a title by the day fixed for completion, the purchaser can treat the contract as at an end and recover his deposit with interest and the costs of investigating the title. In such cases, however, equity having a concurrent jurisdiction did not look upon the stipulation as to time in precisely the same light. Where it could do so without injustice to the contracting parties it decreed specific performance notwithstanding failure to observe the time fixed by the contract for completion, and as an incident of specific performance relieved the party in default by restraining proceedings at law based on such failure.
This is really all that is meant by and involved in the maxim that in equity the time fixed for completion is not of the essence of the contract…"
"Again, although the vendor's conduct may not, under the circumstances, be alone sufficient to disentitle him to specific performance, yet if he has been guilty of unnecessary delay, and the purchaser has served him with a notice limiting a time at the expiration of which he will treat the contract at an end, equity will not, after the expiration of such time, provided it is a reasonable time, enforce specific performance or restrain an action at law."
"Now, as a matter of construction merely, I apprehend the words must have the same meaning in equity as at law. The rights and remedies consequent on that construction may be different in the two jurisdictions, but the grammatical meaning of the expression is the same in each."
"(a) Equity, before the Judicature Acts, insisted that prima facie time for payment was not essential. But equity's patience was exhaustible. It would allow the contract to be treated as repudiated if the party in default had been given the opportunity to mend his ways by the giving of a notice to comply within a reasonable time. Whilst this is described as making time of the essence in reality the notice is the means of bringing to an end equity's interference with the contract: Behzadi v Shaftesbury Hotels Ltd  Ch 1;
(b) Such a notice, which may be given in respect of any species of term, may not be served until the time for performance has expired; but it may be served as soon as that time arrives;
(c) Such a notice must state clearly what the other party is required to do and the consequence if he fails ie that the contract may be terminated; Afovos Shipping Co SA v R Pagnan and Flli (The Afovos)  1 Lloyd's Rep. 562, 565 col 2;  1 WLR 848, 854C;
(d) If the defaulting party fails to perform after service of such a notice, the failure is not automatically a repudiation of the contract, giving rise to a right to terminate. The breach must go to the root of the contract;
(e) The notice operates as evidence of the date by which the promisee considers it reasonable to require the contract to be performed, failure to perform by which is evidence of an intention not to perform: see Lord Simon of Glaisdale in United Scientific Holdings Ltd v Burnley Borough Council  AC 904, 946E-947A; Astea (UK) Ltd v Time Group Ltd  EWHC 725 (TCC) para 147."
"193 Mr Gourgey submitted that if time had been made of the essence, then a failure to comply with the time limit automatically amounted to a repudiatory breach of contract. However, in the light of authority he did not press that submission. In Re Olympia & York Canary Wharf Ltd (No. 2)  BCC 159 Bear Stearns International ("BSI") entered into an agreement for lease to take a floor in Canary Wharf. Clause 6 provided for Olympia & York Canary Wharf Ltd ("O & Y"), the intending landlord, to take over the Bear Stearns group's liabilities under existing leases and, in clause 6(c)(v), to indemnify Bear Stearns in respect of all reasonable costs and expenses incurred by Bear Stearns in respect of their continuing obligations as tenant under the leases. After an administration order had been made in respect of O & Y, BSI invoiced O & Y for sums due under the leases in respect of rent etc. BSI then demanded further sums due under the leases and the rent etc already paid by BSI and invoiced to O & Y. In the same letter BSI asked the administrators for confirmation that they would honour O & Y's obligations under the agreement to lease; and said that if they did not receive it they would treat that as a repudiatory breach. When BSI did not receive the sums demanded or the confirmation, they claimed that this constituted a repudiatory breach by O & Y of the agreement, which BSI had then accepted.
194 It was common ground that the term in question was not a condition of the contract; but BSI contended that time had been made of the essence of the obligation to pay. Morritt J thus considered whether time could be made of the essence of any term of the contract (whatever its legal character), and if so, what was the effect of a failure to comply with an imposed deadline. He held that the effect of making time of the essence was to remove equity's interference with a party's rights at common law, with the result that time could be made of the essence of any contractual obligation. However, he went on to consider whether a failure to comply with an imposed deadline necessarily amounted to a repudiatory breach of contract. He held that it did not. He said:
"First there is nothing in Federal Commerce v Molena Alpha  AC 757 to suggest that the principles expressed, particularly by Lord Wilberforce at pp. 778–779, have no application to stipulations in respect of which time is originally, or is made, of the essence. Second, if the effect of making time of the essence is, as described by Nourse LJ in Behzadi v Shaftesbury Hotels Ltd, to remove equity's interference with the legal rights of the parties, the natural inference is that those rights arise from the ordinary principles of the common law and are not something special consequential on the removal of that interference. Third, and arising from the second consideration, if failure to comply with a notice making time of the essence of itself constitutes a repudiation irrespective of the consequence of the breach, then contrary to the statement of Lord Denning in Eshun v Moorgate Mercantile  1 WLR 722 at p. 726 it is possible to put upon another a repudiation which he has never committed. Fourth, there is no suggestion in Universal Cargo Carriers Corp v Citati  2 QB 401 that the delay in providing the cargo would have been a ground of rescission if notice had been given making time of the essence."
195 Accordingly it was still necessary to consider whether the breach relied on went to the root of the contract or deprived the injured party of a substantial part of the whole benefit that he was entitled to receive. Morritt J concluded:
"The failure to pay did not deprive BSI of anything of value to BSI. BSI was not and is not liable to the landlord under the Devonshire Square leases. The evidence of Mr Hacker, a director of BSI, pointed out that BSI was not the tenant but he provided no evidence to suggest that BSI is in any way liable to the landlord or to Bear Stearns International Corp by way of indemnity against the liabilities arising from the Devonshire Square leases. So far as BSI is concerned the unperformed obligations of the parties under the agreement to lease are the grant and acceptance of the underlease of floor 25. The underlease of floor 25 is the benefit to BSI to which it is entitled. The breach on which BSI relies does not affect these obligations and does not deprive BSI of this benefit."
196 This was followed by Christopher Clarke J in Dalkia Utilities Services plc v Celtech International Ltd  1 Lloyd's Rep 599 in which he said (§ 131 (d)):
"If the defaulting party fails to perform after service of such a notice, the failure is not automatically a repudiation of the contract, giving rise to a right to terminate. The breach must go to the root of the contract."
197 In the Dalkia case Celtech had failed to pay certain instalments due under a financing agreement. It told Dalkia that it could not honour its commitments as they fell due and asked for a six month moratorium. Christopher Clarke J considered whether time had been made of the essence of the obligation. As I read the judgment (§ 132) he held that it had not been because the letter relied on had given an unreasonably short deadline; but he went on to say that in any event the breach relied on was not, even after the expiry of the notice, such as went to the root of the contract. He decided that the correct test to apply was that stated in Chitty on Contracts (§24-018):
"If one party declares his inability to perform some, but not all, of his obligations under the contract, then the right of the other party to treat himself as discharged depends on whether the non-performance of those obligations will amount to a breach of a condition of the contract or deprive him of substantially the whole benefit which it was the intention of the parties that he should obtain from the obligations of the parties under the contract then remaining unperformed."
198 Applying this test, Christopher Clarke J held that this did not amount to a repudiation, because it did not evince an intention to perform in such a manner as would deprive Dalkia of substantially the whole benefit of the contract. The position might have been different if Celtech had said that it could never pay; but those were not the facts.
199 Mr Gourgey took issue with the last part of this. He made the fair point that if the question was whether the failure by the party in breach to perform his obligation by the deadline set by making time of the essence deprived the innocent party of substantially the whole benefit of the contract, then that was the same question that would be asked even if time had not been made of the essence. If that were right, then there was no point in serving a notice making time of the essence. To take an example: if time is made of the essence of completion of a contract for the sale of a house, the defaulting buyer is not saved by turning up with the money one day late. The question whether the breach in failing to complete in accordance with a time limit of which time has been made of the essence amounts to a repudiation is decided on the tacit basis that it is to be assumed that the buyer will never complete. In support of his submission Mr Gourgey relied on other parts of the judgment of Morritt J in the Olympia & York case. Morritt J quoted an observation of Mason J in an Australian case concerning the case of non-completion of a purchase of land:
"The result of non-compliance with the notice is that the party in default is guilty of unreasonable delay in complying with a non-essential time stipulation. The unreasonable delay amounts to a repudiation and this justifies rescission."
200 Commenting on that observation, Morritt J said:
"This was said in reference to the completion of contracts for the sale of land. Thus although the contractual date for completion may be inessential, failure to complete at all will go to the root of the contact. Accordingly, Mason J was not considering the case of a term which was inessential in that sense. What was initially non-essential was the stipulation as to time not nature of the term, which plainly was a term breach of which was capable of going to the root of the contract."
201 Thus Mr Gourgey submitted that if the nature of the term was essential in the sense that a failure to comply with it at all would be a repudiation, then a failure to comply with it by a time limit that had been made of the essence would also amount to a repudiation. In my judgment Mr Gourgey's submission is also supported by the test that Christopher Clarke J applied in Dalkia. He equiparated renunciation and repudiation. The basic test for renunciation is whether non-performance of the obligation (as opposed to timely performance of the obligation) would go to the root of the contract. This also explains why failure to complete a land purchase in accordance with a notice to complete amounts to a repudiation, even though the additional day's delay of itself causes no material prejudice to the seller. It is true that the fourth of Morritt J's reasons in Olympia & York suggests that the test is the same whether or not a notice making time of the essence has been served; but in my judgment the service of such a notice must have some effect. On the facts of Olympia & York it seems to me that even an indefinite or permanent failure to pay the invoices could not have amounted to a repudiation. So Morritt J was undoubtedly correct in deciding the case as he did. I do not think that there is any authority binding on me which precludes my adoption of the view that I think is right in principle. I conclude therefore that the service of notice making time of the essence changes the question from whether delay amounts to a repudiation to the question whether failure to perform the obligation at all amounts to a repudiation."
i) a time limit attached to a contractual term is not complied with; and
ii) the injured party gives notice requiring performance within a reasonable time;
then a failure to comply with the notice amounts to a repudiation if an outright refusal to perform that term would have amounted to a repudiation.
"61. … First, in this area of the law, as in many others, there is a danger in attempts to clarify the application of a legal principle by a series of propositions derived from cases decided on their own particular facts. Instead of concentrating on the application of the principle to the facts of the case in hand, argument tends to revolve around the application of those propositions, which, if stated by the Court in an attempt to assist in future cases, often become regarded as prescriptive. So far as concerns repudiatory conduct, the legal test is simply stated, or, as Lord Wilberforce put it, "perspicuous". It is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contact.
62. Secondly, whether or not there has been a repudiatory breach is highly fact sensitive. That is why comparison with other cases is of limited value. The innocent and obvious mistake of Mr Jones in the present case has no comparison whatever with, for example, the cynical and manipulative conduct of the ship owners in The Nanfri.
63. Thirdly, all the circumstances must be taken into account insofar as they bear on an objective assessment of the intention of the contract breaker. This means that motive, while irrelevant if relied upon solely to show the subjective intention of the contract breaker, may be relevant if it is something or it reflects something of which the innocent party was, or a reasonable person in his or her position would have been, aware and throws light on the way the alleged repudiatory act would be viewed by such a reasonable person. So, Lord Wilberforce in Woodar (at p. 281D) expressed himself in qualified terms on motive, not by saying it will always be irrelevant, but that it is not, of itself, decisive.
64. Fourthly, although the test is simply stated, its application to the facts of a particular case may not always be easy to apply, as is well illustrated by the division of view among the members of the Appellate Committee in Woodar itself."
Lord Justice Etherton:
Lord Justice Rix: