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Cite as: [2010] 3 WLR 911, [2010] EWHC 456 (Ch), [2011] 1 Ch 115, [2011] Ch 115, [2010] 4 All ER 914

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		Neutral Citation Number: [2010] EWHC 456 (Ch)
		Case No: CH.2009.APP.0705

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

11/03/2010

B e f o r e :

THE HON MR JUSTICE LEWISON
____________________

Between:

	Mr Chin En Ng Mrs Diane Louise Ng	Appellants
	- and -
	Ashley King (Developments) Ltd	Respondent

____________________

Mr David Berry of Berry & Walton for the Claimants
The Defendant appeared by its representative Mr John Walton
Hearing dates: 4th March 2010
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Lewison:

In 2003 Mr and Mrs Ng bought a house at 5 Babingley Place, Kings Lynn from Ashley King Developments Ltd, who had built it. They said that it had been so badly built that it was unsaleable. The resulting dispute between them and Ashley King was compromised as a result of a mediation in March 2008. The compromise involved Ashley King agreeing to buy back the house for £380,000. A contract recording that bargain was made between them on 18 March 2008. On the front sheet of the contract the deposit was stated to be "nil". On the following day Mr and Mrs Ng entered into a contract with Mr Sharp to buy the house next door at 4 Babingley Place, also for £380,000. On the front sheet of that contract the deposit was also stated to be "nil". Completion of each contract was to take place 28 days after written notice from the seller to the buyer. Both contracts incorporated the Standard Conditions of Sale 4^th edition. Both contracts also incorporated special conditions. Special condition 7 of each contract provided:

"In the event of the deposit amounting to less than 10% of the total price, if the Seller is ready willing and able to complete but the buyer for whatever reason does not complete, then the balance of the full 10% deposit herein shall forthwith become due and payable by the buyer to the seller without any further notice warning or request by the Seller's solicitors and without prejudice to any other rights or remedies of the Seller."

Standard condition 6.8 deals with the service of a notice to complete. Condition 6.8.3 says:

"On receipt of a notice to complete:

(a) if the buyer paid no deposit he is forthwith to pay a deposit of 10 per cent."

Standard condition 7.3 is headed "Late completion". It provides (so far as relevant):

"7.3.1. If there is default by either or both of the parties in performing their obligations under the contract and completion is delayed, the party whose total period of default is the greater is to pay compensation to the other party.

7.3.2 Compensation is calculated at the contract rate on an amount equal to the purchase price and the chattels price, less (where the buyer is the paying party) any deposit paid, for the period by which the paying party's default exceeds that of the receiving party, or, if shorter, the period between completion date and actual completion.

7.3.3. Any claim for loss resulting from delayed completion is to be reduced by any compensation paid under this contract."

Standard condition 7.5 says (so far as relevant):

"7.5.1 If the buyer fails to complete in accordance with a notice to complete the following terms apply.

7.5.2 The seller may rescind the contract, and if he does so:

(a) he may

(i) forfeit and keep any deposit and accrued interest

(ii) resell the property and any chattels included in the contract

(iii) claim damages

(b)….

7.5.3 The seller retains his other rights and remedies."

Mr and Mrs Ng gave notice under their contract with Ashley King on 3 April 2008, with the result that completion was due on 1 May. Ashley King failed to complete; and this had the knock on effect that Mr and Mrs Ng could not complete their purchase of No 4. On 2 May 2008 Mr and Mrs Ng gave formal notice to complete under standard condition 6.3. Ashley King still failed to complete. On 24 June 2007 Mr and Mrs Ng issued proceedings for specific performance; and an order in their favour was made on 11 July 2008. That order also included an order that Ashley King make a payment of £1,000 on account of damages. Ashley King still failed to complete. By November Mr and Mrs Ng had given up hope of compelling completion and applied for the order of specific performance to be discharged, so that they could recover damages instead. The order for specific performance was discharged on 10 November 2008, and Ashley King were ordered to pay £37,000 as a further payment on account of damages. Ashley King have complied with the orders to pay money on account. So Mr and Mrs Ng have received an amount equal to the 10 per cent deposit required by the contract. They have, of course, also retained ownership of No 5.

While their dispute with Ashley King was proceeding, Mr and Mrs Ng tried to save their contract to purchase No 5. They were also put to incidental expense (such as the abortive costs of hiring a removal van; and the cost of hotel accommodation). Mr Sharp had served them with notice to complete on 6 May 2008; but without the money from Ashley King, they could not comply with that notice. Mr and Mrs Ng agreed an extension of time with Mr Sharp; but there was a price to pay. On 13 June 2008 Mr Sharp agreed to extend time for completion by 28 days in return for a payment of £11,500-odd. This was made up of £4,861.47 in respect of costs that Mr Sharp said he had incurred and £6,652.70 interest. The interest represented interest on the whole of the purchase price. On 28 July 2008 Mr Sharp terminated the contract because of Mr and Mrs Ng's inability to complete and demanded the deposit of £38,000 due from them under special condition 7 or Standard condition 6.8.3 of their purchase contract. In October 2008 Mr and Mrs Ng granted a charge in favour of Mr Sharp to secure payment of the deposit. On 3 December Mr and Mrs Ng redeemed that charge and paid Mr Sharp the deposit of 10 per cent plus interest.

The assessment of damages payable by Ashley King to Mr and Mrs Ng came before DJ Wharton in the Chancery Division, Peterborough District Registry. Mr and Mrs Ng's claims were set out in a Scott Schedule. They included:

i) The deposit of £38,000 payable to them under their contract with Ashley King. Ashley King accepted liability for this, subject to that sum being brought into account in the overall assessment of damages.

ii) The deposit of £38,000 payable by them under their contract with Mr Sharp. Ashley King admitted liability for one deposit only. The claim also included the amount that Mr and Mrs Ng had paid to Mr Sharp in order to redeem the charge. On the face of it this item duplicated the claim for the deposit that was payable to Mr Sharp under the contract.

iii) Interest on the contract sum of £380,000 payable under their contract with Ashley King at the rate of 9 per cent on £380,000 for 193 days, from the completion date to the date on which the order for specific performance was discharged. This amounted to £6,600. Ashley King denied liability.

iv) The interest, amounting to £6,653, that Mr and Mrs Ng had agreed to pay Mr Sharp as the price of the extension of time. Ashley King denied liability.

The judge held a hearing over two days on 9 July 2009 and 14 September 2009. On 20 October 2009 he sent a draft judgment to the parties "to be handed down on a date to be fixed". In that draft he said that:

i) It was reasonably foreseeable that upon exchanging contracts to sell No 5 to Ashley King Mr and Mrs Ng would simultaneously enter into a contract to buy another house; and that if Ashley King failed to complete the purchase of No 5, Mr and Mrs Ng would be unable to complete their associated purchase. Not only that, but Ashley King actually knew that Mr and Mrs Ng intended to buy elsewhere concurrently with the sale of No 5.

ii) He could see no possible difference of principle between bringing a forfeited deposit into account where there is a resale and where there is not; and he could see no difference in principle in requiring a vendor to give credit for a forfeited deposit against liquidated damages or special damages incurred by reason of a purchaser's failure to complete.

iii) Mr and Mrs Ng were entitled to recover the deposit payable to them by Ashley King, but it must be set off against other damages.

iv) Mr and Mrs Ng were entitled to recover the deposit paid by them to Mr Sharp. But it too had to be set off against other damages. He also appears to have allowed the amount that Mr and Mrs Ng had paid to redeem the charge in favour of Mr Sharp.

v) Mr and Mrs Ng were not entitled to recover contractual interest, because that was only payable for late completion; and completion had not taken place.

vi) Mr and Mrs Ng were not entitled to recover the interest that they had paid to Mr Sharp because they were not legally liable to pay it (since completion of their purchase had not taken place); and the judge was not satisfied that the payment was a reasonable compromise.

On receipt of the draft judgment Mr Berry, Mr and Mrs Ng's solicitor, submitted a form of draft order. The draft order required Ashley King to pay £76,000 (the deposit on Mr and Mrs Ng's sale and the deposit on their purchase) plus interest on that sum. The set off to which the judge referred was given effect by not including any of the other sums that he had allowed as damages. Ashley King's solicitors considered that his draft did not reflect what the judge had decided. The fundamental point of disagreement was whether the judge had decided that Mr and Mrs Ng were entitled to recover the deposit payable to them by Ashley King without bringing that sum into account in the overall assessment of damages. After an exchange of e-mails the judge sent an e-mail to both solicitors on 9 November 2009 in which he said:

"I have reconsidered my judgment – although I had not previously considered there had been any ambiguity about the Claimants' adjudged right to recover both deposits…. The "net" result (and certainly this was and remains my intention) is that the Claimants are entitled to forfeit the deposit paid by the Defendants for No 5 and are entitled to receive payment from the Defendants as damages the deposit they ultimately paid to Mr Sharp for No 4 – a total of £78,000. BUT in both cases those deposits must be off-set against other damages in relation to each transaction to which I have found the Claimants entitled. As it seems to me, that is largely the result "postulated" by Mr Berry's draft order."

Ashley King's solicitors were not satisfied. They sent written submissions to the judge in which they said that he had in fact decided that Mr and Mrs Ng would have to give credit for the deposit payable to them; and that in any event that was the right approach in principle. Mr Berry responded by saying that they were trying to re-argue the case, which was not permissible. Having seen the submissions the judge decided to hold a hearing to decide what to do. He decided that the draft judgment failed to make his intentions clear. He said that he had fallen into error and that since the judgment had not been perfected he had jurisdiction to alter it. He said that there were exceptional circumstances and that he had failed properly to appreciate that the deposit paid to Mr Sharp was not a deposit in Mr and Mrs Ng's claim but was damages reflecting their liability to pay that deposit. He thus ruled that it must be set off against the actual deposit. The order that the judge actually made was an order for payment of £55,384.22. That order allowed for the recovery of one deposit only. He did not, however, alter the text of his draft judgment.

With the judge's permission Mr and Mrs Ng appeal. The first ground of appeal is that the judge was not entitled to alter (or should not have altered) his draft judgment.

In Robinson v Bird [2003] EWCA Civ 1820 May LJ said:

"91. I respectfully question the emphasis in the paragraph of this judgment to the effect that the same considerations apply to a draft judgment which has been provided to the parties for typographical correction as to a judgment which has been handed down and an order made in consequence. If a judgment has not been handed down or delivered, it has not been given. Until it is given, it is of no effect. Granted that there are obvious reasons why it would be unfortunate, as it has been in this case, for a judge to alter a draft judgment which has been handed to the parties, it remains a draft judgment which, in my view, the judge is at liberty to alter. The jurisdiction to do so is not in doubt. The question is whether "exceptional circumstances" or something less rigorous will enable him to do so in a particular case."

Later in his judgment he said:

"98. The circumstances of the case will usually include the possibility and appropriateness of an appeal. The court in which the problem arises may be a consideration, since appeals in lower courts are generally less troublesome and expensive for the parties than appeals at higher levels. I have indicated my view that there is a material distinction between a judgment that has been handed down or given and a draft judgment which has not yet been handed down. There is also, in my view, a significant difference between a case in which one or more of the parties want to persuade a reluctant judge to reconsider a draft judgment; and a case where the judge himself has decided that his draft judgment is wrong. In the latter case, at least where the judgment is only a draft, I consider that the judge is positively obliged to alter it, however unfortunate the consequences of doing so may appear. It cannot be right for the law to require a judge to hand down for the first time a judgment which he believes to be wrong. In the present case, Mr Wilson's letter appears to have initiated reconsideration by the judge. But as the judge himself said in the judgment which he handed down, he himself entertained doubts about the correctness of his approach and, having invited further submissions, he was persuaded that his initial view was wrong. There is no doubt but that he had jurisdiction to alter his draft. I believe that, since he was persuaded that his initial view was wrong, he was positively obliged to alter it. If I were wrong about that, and if (which I question) "exceptional circumstances" were required, these were such circumstances. It is not suggested that the claimant altered her position as a result of the draft judgment. To that extent, she was not prejudiced by it. I see the force of Mr Holbech's submission that the judge should have given him an opportunity to make oral submissions. But I regard this as a matter of judicial discretion in which the judge cannot be said to have been plainly wrong."

In the same case Peter Gibson LJ aid:

"120. I add a few brief words of my own on the first ground of appeal. With one possible qualification it is in my judgment incontrovertible that until the order of a judge has been sealed he retains the ability to recall the order he has made even if he has given reasons for that order by a judgment handed down or orally delivered. That was established in two decisions of this court: Millensted v Grosvenor House (Park Lane) Ltd. [1937] 1 KB 717 and Pittalis v Sherefettin [1986] QB 869. Such judicial tergiversation is in general not to be encouraged, but circumstances may arise in which it is necessary for a judge to have the courage to recall his order. If, as in Millensted and Pittalis, the judge realises that he has made an error, how can he be true to his judicial oath other than by correcting that error so long as it lies within his power to do so? No doubt that will happen only in exceptional circumstances, but I have serious misgivings about elevating that correct description of the circumstances when that occurs as exceptional into some sort of criterion for what is required for the recalling of an order before it is sealed. The possible qualification to which I have referred is where the judgment handed down or delivered has reasonably been relied on by a party who has altered his position irretrievably in consequence. In such a case the interests of justice may require the judge not to resile from that judgment even if the order has not been sealed. But that is not this case, where it is not suggested that the claimant had altered her position as a result of the draft judgment."

In the present case the judge was persuaded that his draft judgment was wrong. He had not handed it down. It is true that these were his third thoughts rather than his second thoughts, but once a judge has come to the conclusion (however initiated) that his draft judgment is wrong, then, as Peter Gibson LJ pointed out, his judicial oath required him to correct it. In my judgment therefore the judge was fully entitled to recall his draft judgment.

That leads to the main issue on the appeal. If a purchaser is in repudiatory breach of a contract for the sale of land, such that the vendor is entitled to forfeit the deposit; and does forfeit it, must the vendor give credit for the deposit in reduction of the damages that he would otherwise be entitled to recover?

I begin with some general principles. The purpose of an award of damages is to compensate the injured party for the wrong he has received. Where that wrong is a breach of contract, the object of the award is to place the injured party in the position in which he would have been if the contract had been performed. As a general principle, if the injured party has benefited as well as suffered as a result of the breach, he must give credit for the benefit against the loss he has suffered. As Viscount Haldane put it in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673:

"The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. In the words of James L.J. in Dunkirk Colliery Co. v. Lever, "The person who has broken the contract is not to be exposed to additional cost by reason of the plaintiffs not doing what they ought to have done as reasonable men, and the plaintiffs not being under any obligation to do anything otherwise than in the ordinary course of business."

As James L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act."

He summarised this principle by saying that the court must "balance loss and gain".

Second, it is open to the parties to pre-estimate the loss which they believe that a breach of contract will cause, and may contract for a particular measure of damage to be payable on that breach. If the purpose of the clause is to compensate the injured party, rather than to deter a breach of contract by the other party, the courts will hold the parties to their bargain. Such a clause is described as a liquidated damages clause. Where there is an enforceable liquidated damages clause, the party in whose favour the clause operates may recover the amount of the liquidated damages and only that amount. Whether his actual loss is greater than or less than the contractual amount, he is entitled to the contractual amount.

Third, if a clause that purports to fix an amount payable by a party in breach of contract is primarily deterrent in nature, it will be regarded as a penalty. If it is so regarded it will not be enforceable at all, and a party injured by a breach of contract will be left to prove his actual loss.

Fourth, a deposit is something of an anomaly. In the first place it performs at least a dual function. It is both an earnest of performance of the contract, and it is a part performance in the sense that if the contract is completed, the deposit will go in reduction of the purchase price. This is explained by Lord Browne-Wilkinson in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] A.C. 573, approving the judgment of Fry LJ in Howe v. Smith (1884) 27 ChD 89:

"Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser's failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture."

In the second place, as Lord Browne-Wilkinson also explained, long custom has excepted a deposit (not exceeding 10 per cent in the case of the sale of land) from the rule against penalties. Thus the vendor is entitled to forfeit the deposit even if he has suffered no loss. On the other hand, if the deposit exceeds the customary 10 per cent, it will be an invalid penalty, unless the seller can show special circumstances to justify the larger deposit.

A deposit can also serve another function. For example in the case of a residential tenancy, the tenant is often required to pay a deposit (typically one month's rent). The primary function of this kind of deposit, sometimes called a security deposit, is to provide the landlord with a fund from which he can recoup compensation for any breach of contract by the tenant. Any surplus will be returned to the tenant at the end of the tenancy. A deposit paid on, say, booking a hotel room or hiring a car also serves this function as well as being an earnest of performance. Thus in my judgment there is no intrinsic reason why something called a deposit should not be the (or a) source of compensation to the injured party.

Fifth, although in many cases it is open to the parties to exclude a particular right or remedy that the law gives to one or the other of them, they must generally do so by clear words. As Moore-Bick LJ explained in Stocznia Gdynia SA v Gearbulk Holdings Ltd [2008] 2 Lloyd's Rep 202:

"The court is unlikely to be satisfied that a party to a contract has abandoned valuable rights arising by operation of law unless the terms of the contract make it sufficiently clear that that was intended. The more valuable the right, the clearer the language will need to be."

The essence of Mr Berry's argument is that because a deposit is anomalous, and may be retained by the vendor even if he suffers no loss, it is illogical to require it to be brought into account if the vendor has suffered a loss. If he is required to bring it into account he is deprived of his unrestricted contractual right to the deposit to which he is entitled simply as a result of the buyer's failure to complete. In addition, if the deposit is required to be brought into account there is no incentive on the buyer to minimise the effect of his breach.

The question has been considered in some of the cases. I shall take them in chronological order. In Ockenden v Henly (1858) E B & E 485 a contract provided that if the purchaser failed to comply with the contract the deposit would be forfeited to the seller "who shall be at liberty to re-sell and any deficiency upon such resale, together with the expenses, shall be made good by the defaulter". The deposit had not in fact been paid. The buyer failed to complete and the seller resold the property for a lower price. He sued both for the deposit which had not been paid and also for the difference between the contract price and the price achieved on the resale. The Court of Queen's Bench held that credit had to be given for the amount of the deposit in calculating the deficiency on the resale. Lord Campbell CJ said:

"What, then, according to the seventh condition is the deficiency arising upon the re-sale which the seller is entitled to recover? We think, the difference between the balance of the purchase money on the first sale and the amount of the purchase money on the second sale; or in other words the deposit, although forfeited so far as to prevent the purchase from ever recovering it back… still is to be brought by the seller into account, if he seeks to recover it as for a deficiency on the re-sale."

In Daniell v Essex (1874-75) LR 10 CP 538 the contract stated that should the purchaser fail to comply with the conditions of sale "his deposit-money shall be absolutely forfeited to the vendor who shall be at liberty to re-sell the property by public auction or private sale; and if the amount or price which shall be obtained by such second sale shall not be sufficient to cover the amount bid for the same at the present sale and all the expenses of and incidental to the present sale, the deficiency shall be paid by the defaulter to the vendor." The buyer paid a deposit of 20 per cent, but did not complete. The seller forfeited the deposit and sued for the costs he had incurred on the abortive sale to the buyer. There was no resale. The Divisional Court held that he was entitled to the abortive costs in addition to the deposit. Lord Coleridge CJ quoted the clause in the contract and said:

"The deposit, therefore, is absolutely forfeited, and the vendor is at liberty, not bound, to re-sell, and may recover against the purchaser any deficiency on the second sale, together with the expenses of the first sale. The property not having been re-sold in this case, the expenses to which the vendor has been put with reference to the abortive sale are recoverable from the purchaser, plus the deposit-money. The case of Ockenden v. Henly has been referred to; but the circumstances of that case, which are somewhat complicated, are wholly different from those of the present; the deposit had never been paid, and the action was brought for the loss on the re-sale and the expenses of the re-sale; those expenses formed part of the deficiency on the re-sale occasioned by the default of the purchaser; the loss on the second sale would be the deficiency of price and the expenses."

Denman J said:

"With respect to the question of damages, the doctrine in Ockenden v. Henly only applies where the power of re-sale has been exercised; here it has not."

Archibald J said:

"The eighth condition gives the vendor the absolute right to retain the deposit-money paid, on the purchaser's failure without any default of the vendor to complete the purchase; and also a right to claim the expenses of resale, if the property is re-sold. The sale having proved abortive through the default of the purchaser, the vendor is entitled to retain the deposit, and to recover the expenses which he has incurred through that default; he will, therefore, recover the 96 l. 11s. 5d."

Brett J (who had been the trial judge) said:

"Under ordinary circumstances, where the purchaser fails to complete, without any default on the part of the vendor, the latter is entitled to recover all the expenses he has incurred in preparing for the sale, and also the loss incurred upon a re-sale, that is, the difference of price, if any. Here, by the conditions of sale, the deposit is absolutely forfeited upon the purchaser's default, and the vendor is also entitled to recover the expenses he has incurred. If he claimed in addition the difference between the sum bid at the first sale and that realised on a re-sale, then the case of Ockenden v. Henly would apply. Here, however, there has been no re-sale. The vendor therefore is entitled in the first action to recover the expenses incurred by him in preparing for the abortive sale; and he is also entitled to retain the deposit-money of 200l. which was paid into Court to abide the event of the second action."

Daniell v Essex is the foundation of Mr Berry's submission that Mr and Mrs Ng are not obliged to give credit for the deposit to which they were entitled from Ashley King under their sale contract. However, Daniell v Essex has never been referred to in any subsequent English judgment. Had that case come before a modern court it is very likely that the contractual stipulation for a deposit of 20 per cent of the purchase price would have been held to be an unenforceable penalty. The foundation of the court's reasoning appears to have been the construction of the particular contracts both in that case and in Ockenden v Henly which the court distinguished.

In Howe v Smith (1884) Fry LJ, having considered the nature of a deposit in terms approved by Lord Browne-Wilkinson, continued (p. 104):

"Yet another point has been raised and demands decision. The 8th clause of the agreement gives, as I have already stated, a power to the vendor to resell if the purchaser fail in his performance, and declares that the deficiency on such second sale shall be made good by the defaulting purchaser and be recoverable as liquidated damages. In the present case the Defendant, the vendor, declined to perform the contract on the ground of delay on the part of the Plaintiff, the Plaintiff brought this action, and about six months subsequently the vendor resold the property at the original price; and it is contended by the Plaintiff that the Defendant thereby lost all right of retaining the deposit. If the vendor had chosen to resell under this power and to sue the purchaser for the deficiency, he would, in my opinion, and in accordance with the case of Ockenden v. Henly, have been obliged to bring the deposit into account; but that is not the course which he has pursued."

The point here is that the vendor did not sue the purchaser at all. He simply kept the deposit; and the court held that the purchaser was not entitled to its recovery. If he had chosen to sue then he would have had to bring the deposit into account.

In Shuttleworth v Clews [1910] 1 Ch 176 the contract contained a provision for the forfeiture of the deposit on failure by the purchaser to comply with any of the conditions of sale, giving the vendor power to resell, and providing that any deficiency in price which might happen on the resale should be paid by the purchaser to the vendor and in case of non-payment be recoverable by the vendor as liquidated damages. The purchaser paid a deposit but failed to complete the contract. The seller applied for an order that the deposit was forfeit and for an order that if the property were resold at a lower price the buyer should pay the difference. Joyce J said:

"It is quite clear that in calculating the deficiency to be paid by the purchaser on a resale credit must be given by the vendor for the amount of the deposit which he has received."

The cases in which the court has expressly held that the deposit must be set off against the damages claimed by the seller have been cases in which the damages claimed have included a loss sustained by the seller on a resale of the property. There is, I think, no English case involving a sale of land in which (absent a contractual provision to that effect) the seller has been expressly required to set off a deposit against general damages where there has been no resale. Is there any reason of principle which would justify a distinction between the two? McGregor on Damages (18^th edition § 22-039) says that it is difficult to see why this should make any difference. I agree.

Damon Cia Naviera SA v Hapag-Lloyd International SA [1983] 2 Lloyd's Rep. 522 was not concerned with a contract for the sale of land, but with a contract of the sale of ships. The buyer was required to pay a deposit but he did not. The seller terminated the contract and sued for damages and for the deposit. The main argument in the case was whether the seller was entitled to recover the deposit at all, and the court held that he was. Leggatt J went on to say:

"In my judgment the deposit was payable by way of security. Because the right to receive it and therefore to recover it had accrued before Damon's repudiation was accepted, it can be recovered now, if not as such, then by way of damages for breach of the obligation to pay it. The sellers are also entitled to claim damages for repudiation of the contract, but because the sum to which they are entitled in respect of the deposit is greater than their actual loss it will follow that they can recover no sum or no more than nominal damages under this head in addition to the amount of the deposit."

An appeal against this decision failed: [1985] 1 W.L.R. 435. This, then, was a decision in which the deposit was set off against the damages otherwise recoverable. In my judgment there can be no difference of principle between a contract for the sale of land and a contract for the sale of ships.

In Carpenter v McGrath [1996] NSWSC 411 the New South Wales Court of Appeal held by a majority that a seller was required to bring a deposit into account even where there had been no resale. Clarke JA said:

"The overriding principle, however, is that which is expressed in Robinson. For this reason it has long been accepted that if the deposit is forfeited it must be set off against any damages claimed. That rule does not simply apply to a deficiency on resale of the property but applies to all general damages allowed pursuant to the principle in Hadley v Baxendale. (See The Standard Contract for Sale of Land in New South Wales - Butt, p 529, 530; Ockenden v Henly [1858] EngR 757; (1858) 120 ER 590, at 593; Howe v Smith (1884) 27 Ch D 89, at 100, 104-105; Shuttleworth v Clews [1910] 1 Ch 176; Real Estate Securities Limited v Kew Golf Links Estate Pty Limited [1935] VLR 114, at 124; Mallett v Jones [1959] VR 122, at 132; Cowan v Stanhill Estates Pty Limited (No 2) [1967] VR 641, at 649; NLS Pty Ltd v Hughes [1966] HCA 63; (1966) 120 CLR 583, at 589.)."

He added:

"Secondly, there is a decision, Essex v Daniel (1875) LR 10 CP 538, which supports the respondents' submissions. That decision is, however, out of line with the great weight of authority and is regarded by text writers as questionable, if not wrong. (McGregor on Damages, 15th Ed, p 593; Vendor & Purchaser - Stonham, p 710 and Williams on Vendor & Purchaser (4th Ed) Vol II, 1016.) In my opinion Ockenden, which has been applied many times in this country, should be followed and the deposit must be brought to account."

Sheller JA said:

"In Essex v Daniell (1875) 10 LRCP 538, it was said that the doctrine in Ockenden v Henly applied only where the power of resale had been exercised. There is no reason why this should be so. If the property is resold the deficiency may be measured by reference to the price on resale. If the property is not resold the deficiency is measured by the market value at the date of completion otherwise determined.

Essential to Lord Campbell's reasoning was the proposition that, but for the provision enabling the vendor to forfeit the deposit and prevent the purchaser from ever recovering it back, any part of the purchase price paid which the vendor had retained and which the purchaser was entitled to recover, had to be brought into account against damages recoverable by the vendor from the purchaser on the termination of the contract, being damages flowing from the purchaser's breach of contract in failing to complete. It follows that if a deposit has been paid by a purchaser and forfeited under the contract, and the damages flowing from such breach total less than the deposit, the vendor may retain the deposit, but if such damages exceed the deposit, the vendor may recover from the purchaser no more than the amount of the surplus. The Court was not concerned with amounts claimed by the vendor under the provisions of the contract imposing obligations upon the purchaser separate from the obligation to complete. Such were the occupation fee and cost of repairs held in Cratchley v Bloom to be recoverable and not brought to account against the deposit. The distinction is explained by Professor Butt, Standard Contract for Sale of Land in New South Wales, 1985, at 530.

In the present case the heads of damage allowed, namely, for the loss of deposit on forfeiture on sale of Tippaburgh, removal expenses, and the legal costs and expenses on the sales, were damages which flowed from the appellants' failure to complete the contract and as such must be set off against the deposit forfeited. Accordingly his Honour was correct in his approach and this ground of cross appeal fails."

In Polyset Ltd v Panhandat Ltd [2002] HKCFA 15 the Hong Kong Court of Final Appeal considered the nature of deposits. Mr Justice Bokhary PJ said:

"Provided that what the vendor takes as a deposit is within the bounds of an earnest of performance, it will constitute a true deposit. As such, it will be forfeited to the vendor if the purchaser wrongfully fails to perform his part of the bargain. This is so even if the vendor's loss is less than the deposit. It is so even if the vendor suffers no loss at all. Indeed, it is so even if the vendor makes a profit by selling the property to someone else at a higher price. If the vendor's loss exceeds the deposit, he is of course entitled to recover the full extent of his loss, giving credit for the deposit forfeited to him."

Mr Justice Chan PJ said:

"The confusion sometimes arises where there are provisions in a contract which stipulate for the forfeiture of a deposit as well as the vendor's right to deal with the property upon a repudiation by the purchaser and then to claim any consequential loss (in which event, the forfeited deposit may have to be taken into account when considering the loss suffered by the vendor); or where the provisions stipulate the vendor's right to retain all or any part of the money paid under the agreement which was described not only as deposit but also as agreed liquidated damages. In those cases where the court treated the clause as in truth a liquidated damages clause, it refused to sanction the forfeiture of a deposit and held that the clause was only valid if the amount was a genuine pre-estimate of loss."

Mr Justice Ribeiro PJ said:

"Having forfeited the deposit for failure to complete, the vendor remains entitled at common law to sue for damages, giving credit for the forfeited deposit where such damages exceed its amount."

Lord Millett NPJ agreed with all three of these judgments.

In Commissioner for Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 the joint judgment of Gleeson CJ and Gummow, Heydon, Crennan and Kiefel JJ, discussing the nature of a deposit, states:

"Thirdly, where, as here, the contract was terminated for breach, the deposit would be brought into account in any assessment of damages if an action were pursued against the purchaser."

The authorities cited in support of that statement included Carpenter v McGrath. The majority decision in that case has thus been approved by the High Court of Australia.

Accordingly in Australia and Hong Kong it appears to be the law that a seller must give credit for the deposit against the damages to which he is entitled from the buyer as a result of the latter's failure to complete.

So far as the text books are concerned, Emmett & Farrand on Title say (§ 7.012):

"The vendor must give credit for the deposit, notwithstanding that the contract contained a stipulation that, if the purchaser failed to comply with the condition, the deposit should be forfeit."

The Law Society's Conveyancing Handbook says (§ 3.59):

"Credit must be given in the claim for damages for any compensation received under Standard Condition 7.3 … or for any deposit forfeited by the seller."

Finally, Megarry & Wade: The Law of Real Property (7^th edition) state (§ 15-108):

"If the vendor terminates the contract on account of the purchaser's default, he may forfeit the deposit, even though the contract makes no express provision for so doing. If that does not adequately compensate him for his loss, he may recover any additional loss as damages."

In my judgment Mr and Mrs Ng must give credit for the amount of the deposit in reduction of the damages that would otherwise be recoverable from Ashley King. My reasons are as follows:

i) The overriding principle in any assessment of damages for breach of contract is to compensate the injured party rather than to punish the contract breaker. In assessing damages the court should balance loss and gain;

ii) Subject to the rules prohibiting penalties, the parties to a contract may exclude particular rights and remedies (such as set off of gains against losses) but if they do so, they must use clear words.

iii) The Standard Conditions do not purport to exclude any right of set off.

iv) Daniell v Essex has never been followed in any subsequent case; and it has been expressly disapproved in Australia in a case subsequently approved at the highest level. It is criticised in the leading text book on damages. It is inconsistent with the subsequent decision in Damon Cia Naviera SA v Hapag-Lloyd International SA which was affirmed by the Court of Appeal. The decision in Daniell v Essex turned on the construction of the particular contract. Had it come before a modern court, the contractual clause would have been held to be an invalid penalty.

v) Ockenden v Henly has been consistently cited for the proposition that, at least where there has been a resale, credit must be given for the deposit. In my judgment there can be no distinction in principle between a case where there has been a resale and a case where there has not. In the first case damages will take as their starting point the difference between the contract price and the price achieved on the resale, while in the latter case they will take as their starting point the difference between the contract price and market value. But market value is the price that would have been achieved if there had been a resale, so the underlying theory is precisely the same.

vi) The consensus of opinion among the text book writers is that the seller is bound to give credit for the deposit, and this was also the view of the Hong Kong Final Court of Appeal. It is reasonable to suppose that this is the ordinary understanding of parties to contracts for the sale of land which require the payment of a deposit. It corresponds with many other circumstances in which deposits are paid.

In my judgment, therefore, the judge should have required Mr and Mrs Ng to give credit for the deposit that Ashley King eventually paid them. In fact the order that he made took a slightly different form. He disallowed their claim for the deposit that they had paid Mr Sharp under their purchase contract but gave judgment for the deposit that Ashley King were liable to pay. But because the amount of the deposit paid to them was the same as the deposit they paid Mr Sharp the substance of the order was that they were, in effect, required to give credit for the deposit paid to them. Mathematically, therefore, the judge's order was in my judgment correct.

The second point in the appeal concerns interest. Mr and Mrs Ng originally claimed interest on the whole of the unpaid purchase price. Mr Berry recognises that that claim cannot be sustained. What he says, however, is that the judge ought to have awarded interest at the contract rate (9 per cent) on the amount of the unpaid deposit, from the time when it should have been paid (the contractual completion date) to the date when the order for specific performance was discharged and the contract ceased to exist.

The starting point for this claim is special condition 7. This provides that if the seller is ready willing and able to complete, but the buyer does not complete, then the full amount of the 10 per cent deposit becomes due. Mr and Mrs Ng were ready willing and able to complete on the contractual completion date, and therefore Ashley King's obligation to pay £38,000 was triggered. That contractual obligation subsisted for as long as the contract subsisted, and contractual interest was therefore due during that period. An alternative view is that the deposit became payable under Standard condition 6.8.3 when Ashley King received notice to complete. There is only one day's difference between these two dates.

The judge decided that contractual interest (and therefore interest at the contract rate) could only be claimed under Standard condition 7.3. He held that that only gave rise to an entitlement to interest in the event of delayed completion. If there never was any completion at all then condition 7.3 could not apply. He therefore held that Mr and Mrs Ng were not entitled to interest at the contract rate. Once the contract was discharged, condition 7.3 fell away. He went on to say that there was:

"no corresponding claim in damages (and it is difficult to see how there could be); thus, submit the Defendants, there can be no claim to statutory interest under section 35A…. The point in my judgment is that any claim for money arising from failure to complete is the loss, if any, arising on the resale, together with associated expenses. Without such loss (damages) there can be no statutory interest claim."

In Aribisala v St James Homes (Grosvenor Dock) Ltd (No 2) [2008] 2 EGLR 65 Floyd J considered the effect of Standard Condition 7.3. He accepted the submission that condition 7.3 was a regime for late completion, not a regime for non-completion. He continued:

"In my judgment, it is not correct to read the combined effect of clause 7.5.3 and clause 7.3 and the standard conditions (and 1.3 of the contract) as allowing a claim for contractual compensation once the contract is at an end. Once the purchaser has failed to comply with the notice to complete and the contract has been rescinded, the purchaser has the specific rights provided by clause 7.5.2, and all other rights that the law provides for breach of contract, but not the specific rights provided under the contract for late, as opposed to non-performance. Those specific rights are brought to an end by the rescission of the contract."

I agree with this analysis. In my judgment, therefore, and in agreement with the judge, Mr and Mrs Ng were not entitled to contractual interest on the deposit.

That, however, leads to the claim for statutory interest. The original claim included a claim for interest on the whole of the purchase price. As I have said Mr Berry accepted that this claim could not be sustained.

Section 35A (1) of the Senior Courts Act 1981 provides:

"Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and—

(a) in the case of any sum paid before judgment, the date of the payment; and

(b) in the case of the sum for which judgment is given, the date of the judgment."

It will be seen that the section applies where there is a claim for recovery of a debt or damages; not just damages. The deposit became payable, at the latest, on 2 May 2008 when they served notice to complete on Ashley King. It was due as a debt payable under the contract. The right to that debt was an accrued right which, in my judgment, was not abrogated by the subsequent acceptance of Ashley King's repudiation of the contract. It follows in my judgment that there was a valid claim for interest under section 35A in relation to the unpaid deposit. However, the judge's discussion of the claim under section 35A must be read in context. He was dealing with the claim to interest on the whole of the purchase price. In fact he dealt with the claim to interest on the deposit at an earlier stage of his judgment. That claim had formed item 2.4 in the Scott Schedule supporting Mr and Mrs Ng's claim. In his judgment the judge recorded that that this item was conceded and agreed at £2,014.52. The effect of his judgment therefore was that he did award interest on the unpaid deposit.

In awarding interest on other items under section 35A the judge adopted a rate of interest of 3 per cent per annum. That was a matter for his discretion. Once the claim for contractual interest has fallen away, there is no ground for interfering with the judge's discretionary choice of interest rate (and no such ground was suggested).

The result, therefore, is that the amount awarded by the judge is mathematically correct; and the appeal must be dismissed.