England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		09/12/2004

Mr Justice Lightman:

PRELIMINARY

1. This is an appeal by the defendants Mallan Limited and Meritcape Limited ("the Defendants") from the decision of Master Bragge dated the 24^th May 2004 ("the Decision"). By the Decision the Master gave summary judgment under CPR Part 24 in favour of the claimant Ashfield Land Ltd ("the Claimant") on its claim for repayment by the Defendants of the deposit of £600,000 ("the Deposit") which it had paid under a contract made with the Defendants dated the 19^th February 2003 ("the Contract") and refused permission to appeal. I gave permission to appeal.
2. By the Contract the Defendants agreed to sell and the Claimant agreed to purchase Park Court, Warwick Road, Coventry ("Park Court") for the sum of £6 million of which the sum of £600,000 was to be paid as a deposit to the Defendants' solicitors. The deposit was duly paid. The Contract has been rescinded in accordance with its terms. The issue between the parties is whether under the terms of the Contract in the circumstances which have arisen the deposit is repayable to the Claimant or has been forfeited to the Defendants.

RELEVANT BACKGROUND FACTS

3. On the 26^th November 2002 the Claimant agreed "Heads of Agreement" with the Council for the City of Coventry ("Coventry CC") which was expressed to be subject to five conditions namely, subject to contract, subject to planning, subject to cabinet approval, subject to formal closure of the car park and subject to the confirmation of the Claimant's formal acquisition of Park Court. The Heads of Agreement provided for the grant by Coventry CC to the Claimant for a premium of £1.5 million of a 150 year ground lease (from a date to be agreed) of a site located to the south of Coventry's City Centre extending to approximately .95 acres and shown for identification purposes only marked red on the attached plan ("the Council's Land") on the terms there set out. The 150 year ground lease was to be documented by way of a building agreement and agreement for lease preceded by a conditional contract. The Heads of Agreement provided that funding and planning (subject to appeal and judicial review) should be secured by April 2003, and Coventry CC reserved the right to withdraw or vary the offer if the building agreement was not completed by June 2003 and as the "Long Stop Date" the Claimant was to complete the agreed works within eighteen month from the commencement of the building lease.
4. Cabinet Approval of the Council of the Heads of Terms was given on the 18^th February 2003. By letter to Coventry CC dated the 11^th December 2002 headed "subject to contract and planning permission", the Claimant wrote confirming the Heads of Terms and clarifying points since discussed on the telephone. These points included:

"…2. An agreement for lease will be signed with the ground lease running from the point when the agreement becomes unconditional i.e. when planning permission is granted, site investigation is completed and vacant possession of the car park is granted.

…7. Long stop date – the building programme may well be 24 months even before acts of god are taken into account."

5. By letter dated the 13^th December 2002 Coventry CC commented on the points raised:

"2. It is agreed that an agreement for lease will be signed (although there will be some time scales incorporated ensuring both parties act using their best endeavours to secure the outstanding points and enabling the lease to become unconditional). It is agreed that the agreement for lease will become effective when planning permission is granted, the site investigation has been completed and vacant possession of the car park is obtained.

…7. Regarding the long stop date can you please provide a provisional programme outlining where Grosvenor Road Car Park and the proposed development on this area is within it. I assume that it still remains within phase 1 of the proposed development."

6. The Contract was entered into on the 19^th February 2003. The Contract was for the purchase by the Claimant from the Defendants of Park Court for £6 million and provided for the payment to the Defendants' solicitors of the Deposit. Clause 11.2 provided that Completion was to take place within seven days of the Claimant entering into a "Council Contract" which was defined in Clause 11.1.2 as "a legally binding agreement (whether or not conditional) for the acquisition and disposal of the Council's Land" shown for the purpose of identification on the plan attached to the "Heads of Terms". The "Heads of Terms" was defined in clause 11.1.5 as the Heads of Agreement "or any amendments or variations thereto which do not materially prejudice the commercial efficacy of the transaction and proposals therein envisaged".
7. Clauses 11.3 and 11.4 provided for the eventuality (which occurred) that the Claimant did not enter into a Council Contract and accordingly that the Contract did not fall to be completed pursuant to clause 11.2. Clause 11.3 gave to the Defendants the option if the Claimant did not enter into a Council Contract (in the events that happened) by the 28^th May 2003 to rescind the Contract by seven days notice in writing and provided that on the expiration of such notice (in the events that happened) "subject to the provisions of clause 11.5" the Deposit should be repaid to the Claimant. The Defendants gave such notice on the 20^th October 2003.
8. Clause 11.4 provided an automatic long stop date for rescission and (subject to the provisions of clause 11.5) for repayment of the Deposit to the Claimant if the Claimant did not enter into a Council Contract by that date. The original long stop date was the 19^th August 2003. The long stop date was however extended to the 29^th September 2003 and later to the 31^st October 2003. The exercise by the Defendants of the right of rescission on the 20^th October 2003 pursuant to clause 11.3 meant that clause 11.4 never came into operation.
9. The critical clause governing entitlement to the Deposit is clause 11.5 which reads as follows:

"11.5 If by the expiration of whichever period may first apply as provided in either clause 11.3 or 11.4 [i.e. the 28^th May 2003] there has been Cabinet Approval of the Council of the Heads of Terms at least two months prior to such expiration [Cabinet Approval had been given on the 18^th February 2003] and subsequent thereto the Council has prior to such expiration [i.e. 28^th May 2003] been and at such expiration remained ready able and willing (or would have been ready able and willing on the assumption of reasonable co-operation on the part of the Purchaser [the Claimant] in negotiating and agreeing the form of the Council Contract and all associated matters and documentation) to exchange a Council Contract with the Purchaser [the Claimant] in substantial accordance with the Heads of Terms but the Purchaser [the Claimant] has nevertheless failed to enter into such Council Contract, then the Deposit shall be forthwith forfeited to the Vendor [the Defendants] and subject to … this Agreement shall otherwise be of no further force and effect."

10. Negotiations proceeded between solicitors for the Claimant and Coventry CC to agree the terms of the Council's Contract. The Council sent to the Claimant its first draft on the 7^th February 2003. After an exchange of letters, the Claimant returned the first draft with a number of preliminary amendments on the 25^th February 2003. On the 26^th March 2003 Coventry CC submitted a second draft. After further correspondence the claimant returned the second draft as further amended. On the 7^th May 2003 Coventry CC submitted a third draft. On the 12^th May 2003, the Claimant notified Coventry CC that the third draft did not incorporate any of the amendments which they had submitted on the 9^th April 2003. On the 21^st May 2003 Coventry CC submitted a fourth draft. A note on the front sheet stated that the numbering needed amending and that the definitions needed to be placed in alphabetical order. On the 4^th June 2003 Coventry CC submitted a fifth draft. On the 11^th June 2003 Coventry CC expressed the view that the documentation was virtually in an agreed form. None of the drafts included any plan or plans identifying the site. In the circumstances it is plain, even as it is common ground, that there had yet to come into existence on the 28^th May 2003 any final form of agreement.

THE ISSUE

11. The issue on the Claimant's application for summary judgment is whether the Defendants have any real prospect of establishing entitlement to forfeit the Deposit or whether it is plain and beyond reasonable argument to the contrary that the Claimant is entitled to its return. The outcome turns on the construction of clause 11.5 and in particular the conditions precedent to bring into play the Defendants' right of forfeiture. The alternatives are: (1) (as submitted by Mr David Hodge QC on behalf of the Claimant) that there was required to be in existence on the relevant date (the 28^th May 2003) a form of contract in substantial accordance with the Heads of Terms which Coventry CC was willing to enter into by way of exchange of contracts with the Claimant and which the Claimant declined to enter into and exchange; and (2) (as submitted by Mr Victor Joffe QC on behalf of the Defendants) that there was required only at the relevant date readiness, willingness and ability on the part of Coventry CC to proceed to an exchange of contracts containing terms in substantial accordance with the Heads of Terms, whether or not those terms had been incorporated by that date into a finalised document. It is common ground that there was no such form of contract or formalised document on the 28^th May 2003. The fourth draft of the Council's Contract was not yet in its final form. Accordingly if Mr Hodge is correct in his submission, no question of forfeiture can arise and the Claimant is entitled to the return of the Deposit.

DECISION

12. The Contract provides for the return of the Deposit to the Claimant in the event that the Claimant does not enter into a legally binding agreement (whether or not conditional) for the acquisition and disposal of the Council's Land (referred to in clause 11.1.2 as "a Council Contract") on or before the 28^th May 2003 unless clause 11.5 operates.
13. For clause 11.5 to operate: (1) the Council either (a) must prior to and on the 28^th May 2003 have been ready, willing and able to exchange a Council Contract with the Claimant in substantial accordance with the Heads of Terms; or (b) would have been ready willing and able on the assumption of reasonable cooperation on the part of the Claimant in negotiating and agreeing the form of the Council Contract; and (2) the Claimant must have nevertheless failed to enter into such Council Contract.
14. The Master held that condition 1(b) did not apply because the evidence did not establish any case that the Claimant did not reasonably cooperate in negotiating and agreeing the form of the Council Contract. The Master was plainly correct and there is and can be no challenge to that holding. Whilst condition 1(b) does not apply, nonetheless the terms of condition 1(b) are significant, for they postulate the obligation on the part of the parties to agree the form of the Council Contract and accordingly the importance of the form of the Council Contract.
15. Conditions (1)(a) and (2) do not however require that a form of Council Contract is agreed between Coventry CC and the Claimant. If that were required, there would be no purpose in requiring that the Council Contract be in substantial accordance with the Heads of Terms. All that is required by condition 1(a) is that the Council is ready, willing and able to exchange a Council Contract with the Claimant in substantial accordance with the Heads of Terms. Implicit in this requirement, as it seems to me, is that there is in existence a form of contract in substantial accordance with the Heads of Terms which Coventry is ready, willing and able to exchange. The language is inapposite to and goes beyond a requirement that Coventry CC is merely required to be ready, willing and able to contract with the Claimant to sell the Council's Land on terms in substantial accordance with the Heads of Terms.
16. This construction is reinforced by condition (2). The condition stipulated by condition (2) is that the Claimant has failed to enter into such Council Contract. There has to be in existence a form of Council's Contract which the Claimant has had the opportunity to enter into but has failed to do so. The existence on the 28^th May 2003 of a very advanced stage of negotiations for a Council Contract, and indeed the certainty that negotiations will be very shortly concluded, cannot constitute or give rise to a failure on that date to enter into "such Council Contract". The document must be in final form proffered by Coventry CC for signature by the Claimant.
17. The Master in his careful judgment said (at page 6):

"I find it very difficult on this application, having regard to clause 11.5, to accept that it is appropriate to give the agreement the interpretation that is advanced on behalf of the defendants, namely that one assesses it and sees if, in substance, the matter was agreed.

I think what has to be considered against the evidence is whether at a certain date, namely at 28^th May, the position is or is not on the evidence that there was in existence an agreement in respect of which the council would be willing to exchange….

If the matter were to be judged in the way [submitted by the Defendants], it seems to me that it would lead to potential difficulties of interpretation. One needs some external method of control to be able to assess the matter, rather than, for example, to assess the matter by whether what is in issue is a matter of substance."

18. In the first two of those passages, the Master reaches the same conclusion on construction that I have reached. The third paragraph supports this conclusion by reference to the commercial improbability that the parties intended that their rights in respect of the Deposit should turn, not on the existence of an objective fact, namely the existence of the form of Council's Contract compliant with the Heads of Terms, but on an assessment of how far matters of substance remained outstanding. In my view the Master's reasoning supports, so far as any support is called for, the construction which he and I have adopted.
19. I accordingly uphold the decision of the Master and dismiss this appeal.