England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London. WC2A 2LL
		14 June 2012

1. This is the trial of a preliminary issue ordered by Mr Justice Newey on 21 December 2011. The preliminary issue is stated to be:

Whether, in the events that have happened, the agreement between the parties dated 28 November 2011 has compromised the present claim and, consequently, whether the Claimant is obliged to withdraw its claim or whether the Claimant is still entitled to maintain its claim herein.

The Background to the Original Action

2. The First Defendant, Mr Ali, is the freehold proprietor of land at Netheridge Farm in Cornwall and in 2007 he sought to borrow some money to carry out a development on that land to make some holiday homes.
3. On the 20^th March 2007 the Claimant, Helmsley, agreed to lend Mr Ali £1,375,000 secured by two legal charges on two adjoining parcels of land. The Second Defendant also has legal charges over the two parcels. On one parcel, the "Development Land", Helmsley has a first legal charge with priority over the Second Defendant but on the other parcel, the "Pink Land", it has a second legal charge ranking behind the Second Defendant.
4. Mr Ali has defaulted on the loan and Helmsley is looking to sell the Development Land under the first legal charge. There is, however, a complication. It is said by Helmsley that the development of the Development Land can only take place with the benefit of easements over the Pink Land on which Helmsley's charge ranks behind the Second Defendant's charge. There are no explicit easements over the Pink Land. Without the necessary easements the effect would be that Helmsley's main legal charge is worthless because it is secured on land where the intended development (without which the value of the land is nugatory) cannot be completed without the consent of the Second Defendant.
5. Helmsley argues that there are implied easements arising by reason of common intention as between Helmsley and Mr Ali which bind the Second Defendant because the Second Defendant subscribed to a deed of priority acknowledging the priority of Helmsley's main legal charge over the Development Land and, since the incidents of that charge include the implied easements, those easements bind the Pink Land with priority over the Second Defendant's legal charge thereover. This argument was not accepted by either of the Defendants.
6. Helmsley commenced proceedings ("the Claim") against the Defendants to resolve the issue of whether a sale of the Development Land would have the benefit of the relevant easements over the Pink Land as against the Defendants. The Claim seeks declaratory relief and costs. There is no relief sought in the Claim for the recovery of the debt or the enforcement of either legal charge.
7. The Defendants have admitted that Helmsley can achieve the required easements by appointing a receiver over the Pink Land but Helmsley points out that any easement arising through a receivership will only be binding on the Second Defendant with the Second Defendant's express consent unless Helmsley is correct in its implied easement argument. Accordingly, Helmsley says that it needs a declaration that it is entitled to the easements.
8. After many months of negotiations, involving solicitors for all three parties, an agreement was reached, the "Settlement Agreement", which was signed by all three parties on 28^th November 2011. Almost immediately the parties disagreed about the effect of the Settlement Agreement.
9. The relevant parts of the Settlement Agreement are:

"Background

(i) Mr Ali is the registered proprietor of the property known as Netherbridge Farm, St Giles on the Heath, Launceston, Cornwall, PL 15 9SS, which is registered at HM Land Registry under Title Number DN352025 ("Netherbridge Farm")

(ii) On 17 January 2007, Mr Ali granted db mortgages a first legal charge over the part of Netherbridge Farm which is coloured pink on the Title Plan attached at Annex A of this Settlement Agreement ("the Pink Land").

(iii) On 31 August 2007, Mr Ali granted Helmsley a first legal charge over the part of Netherbridge Farm which is coloured blue, yellow and mauve on the Title Plan attached at Annex A of this Settlement Agreement ("the Development Land").

(iv) On 31 August 2007, Mr Ali granted Helmsley a second legal charge over the Pink Land which ranks behind db mortgages' charge by virtue of a Deed of Priority which was entered into between Helmsley and db mortgages on the same date ("the Deed of Priority").

(v) On 20 December 2010, Helmsley issued a claim against Mr Ali and db mortgages, which is being heard in the High Court under Claim Number HC10C04533 (" the Claim").

(vi) The Claim is an action asking for a court declaration that Helmsley is entitled to certain easements over the Pink Land.

(vii) Mr Ali filed his Defence on 23 February 2011. db mortgages filed its Defence on 11 March 2011.

(viii) Mr Ali has secured funding from Mayfair Estates Property and Investment Funding Limited ("the New Lender") which it is intended to be secured by a first legal charge on that part of the Development Land which is coloured yellow and mauve on the Title Plan attached as Annex A of this Settlement Agreement.

(ix) The parties have agreed the terms set out in this Settlement Agreement.

Agreement between Helmsley and Mr Ali

1. Helmsley agrees to withdraw the Claim against Mr Ali with no order as to Mr Ali's costs.

2. Mr Ali agrees to pay Helmsley the sum of £270,000 in cleared funds by 06 December 2011 ('the Settlement Sum').

3. As consideration for receiving the Settlement Sum, Helmsley agrees to release its security from Netherbridge Farm, namely its first legal charge over the Development Land and its second legal charge over the Pink Land and Helmsley shall deliver to Mr Ali all necessary discharge documents and deeds and forms duly executed and dated as soon as possible after receipt of the Settlement Sum.

Agreement between Helmsley and db mortgages

4. Helmsley agrees to withdraw the Claim against db mortgages.

5. Helmsley agrees to release db mortgages from the terms of the Deed of Priority.

6. Helmsley agrees to pay the legal costs and disbursements incurred by db mortgages in relation to defending and compromising the Claim to be assessed if not agreed between Helmsley and db mortgages.

Agreement between Mr Ali and db mortgages

7. Subject to the conditions set out in paragraph 9 below, db mortgages will:

....

7.2 Consent to Mr Ali granting the New Lender the following easements over the Pink Land in the event that the New Lender enforces its legal charge over that part of the Development Land which is coloured yellow and mauve on the Title Plan attached at Annex A of this Settlement Agreement ("the Title Plan"):

....

8. ....

9. The agreement by db mortgages to consent to the grant of the easements referred to in paragraph 7 above is conditional upon Mr Ali:

9.1 Paying off in full the outstanding arrears on his mortgage account with db mortgages ...

....

9.4 Making the necessary arrangements and executing the necessary documents to ensure that the fishing rights to which reference is made within entry number 3 in the Property Register of Netherbridge Farm are charged to db mortgages;

10. ...

11. ...

12. This Settlement Agreement constitutes the whole agreement made between Helmsley, Mr Ali and db mortgages and supersedes any letters, telephone conversations, faxes, emails or any other communication."

10. Unfortunately Recital (viii) was not accurate and the proposed funding fell through with the result that Mr Ali was not able to make the payment stipulated in clause 2 of the agreement. A Tomlin Order was drawn up staying the action in the usual terms with the Settlement Agreement as the Schedule. This was signed by the two Defendants but Helmsley refused to sign it. Helmsley argued that, as Mr Ali had failed to make the payment in clause 2 Helmsley was not bound to withdraw the claim against the Defendants. The Defendants argued that there was no dependency between the two clauses and Helmsley was bound to withdraw the action. It was in these circumstances that the Order was made for the trial of the preliminary issue.
11. The trial of the preliminary issue was listed for trial in the week commencing on 23 January 2012. Unfortunately there was no direction for pleadings. The Defendants prepared on the basis that the only issues would be interpretation of the Settlement Agreement and whether the Settlement Agreement had been repudiated. However, Helmsley wanted to argue in the alternative that the Settlement Agreement should be rectified. The Defendants were not ready for a trial on this basis and, as there was seen to be a prospect of settlement, the trial in January was adjourned by consent. A timetable for service of pleadings was agreed.
12. Efforts were made to settle the case and the possibility of a mediation was discussed. This came to nothing but delayed the service of the pleadings. Helmsley served its Points of Claim on 14 March. In addition to rectification this raised a further argument, rescission for mistake. Helmsley's Points of Claim were served out of time according to the timetable and Helmsley attempted to agree a fresh timetable with the Defendants. They were unable to agree a timetable and no Points of Defence had been served by either of the Defendants when the case came before me.
13. Shortly before the matter came on I was informed that Helmsley and the Second Defendant had managed to reach a settlement as a result of which the Second Defendant did not appear before me. I was told that the settlement with the Second Defendant means that Helmsley has achieved what it was seeking in the action. There has been no settlement between Helmsley and the First Defendant. Although the First Defendant was represented by counsel on the aborted hearing of the preliminary issue, before me he appeared in person before me.
14. Counsel for Helmsley, Mr Timothy Morshead QC, suggested that there were three possible courses of action, namely:

1. Debar the First Defendant from defending the Points of Claim for the failure to serve Points of Defence. This would mean that Helmsley would succeed on its alternative cases of rectification and/or mistake;

2. Determine the preliminary issue on the interpretation and repudiation arguments only;

3. Adjourn the trial of the preliminary issue again making an unless order requiring the First Defendant to serve Points of Defence.

15. I was not prepared to follow either (1) or (3) and proceeded to determine the preliminary issue on the grounds of interpretation and repudiation as had been envisaged originally by the Defendants prior to the abortive hearing in January. Although the First Defendant was appearing in person, I had the benefit of a skeleton argument that had been prepared on his behalf for the abortive hearing by counsel.
16. Mr Morshead concentrated on interpretation, the issue being whether the Claimant's obligation to withdraw its claim against the Defendants is dependent on the First Defendant's obligation to pay the promised sum. The Claimant says that the obligations are mutually dependent; the Defendants say that they are independent.
17. Mr Morshead referred me to Chitty on Contracts (30^th edition) at paragraphs 24-34 to 24-36 where the consequences of a case of an 'independent' mutual promise are described: "each party has his remedy on the promise made in his favour without performing his part of the contract and, conversely, neither party can claim to be discharged from liability on the contract by reason of the failure of the other to perform his part". Such a case is described in Chitty as 'exceptional'. I was also referred to the general principles of interpretation summarised by Lord Clarke in Rainy Sky SA v. Kookmin Bank [2012] UKSC 50 at paragraph 21:

"The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other."

18. The arguments advanced on behalf of the First Defendant are summarised in the skeleton argument thus:

"Firstly, it is not a conditional contract for the following reasons:

1. There is no express provision for either a condition precedent or a condition subsequent. The reasonable man would not understand from reading the Settlement Agreement that there was no contractual relationship created until the Settlement Sum was paid. The reasonable man would understand that the Claimant now has a claim in debt as against the First Defendant for £270,000.

2. It is not possible to infer such a condition precedent or condition subsequent as that would be contrary to the express terms in the Settlement Agreement. Clauses 1 and 4 create immediate and clear obligations on the Claimant to withdraw the Claim. By contrast, clauses 3, 7 and 9 all contain conditional obligations. In particular, clause 3 (the Claimant's obligation to release its charges) is conditional upon the performance of clause 2. Such a condition would be redundant if the entire Settlement Agreement was conditional upon the performance of clause 2 by the First Defendant.

3. Given the protection provided to the Claimant by the conditionality of the obligation to release its charges in clause 3, any such implication of a condition precedent or condition subsequent would be unnecessary.

4. Neither the subjective intention of the Claimant (or the Claimant's representatives) nor any pre-contractual correspondence can assist the court with this matter. Clause 12 is an entire agreement clause whereby the parties expressly agree that the Settlement Agreement in its written form supersedes any letters telephone conversations, faxes or other communications.

5. Not only is there no express provision that the Settlement Agreement is conditional upon the payment of the Settlement Sum, the inference of such a term would be contrary to the other express provisions of the agreement.

Secondly, the obligation to withdraw is an independent obligation for the following reasons:

6. Clauses 1 and 4 of the Settlement Agreement are unambiguous. The Claimant agreed to compromise and withdraw the Claim. There is absolutely no express provision for that obligation to be conditional upon the payment by the First Defendant of the Settlement Sum pursuant to clause 2. On the face of the Settlement Agreement, the obligations in clauses 1 and 4 are entirely independent obligations.

7. In contrast to clauses 1 and 4, there are conditional or dependent obligations contained within the Settlement Agreement. Most pertinently clause 3 provides that the Claimant shall deliver the discharge documents and deeds "as soon as possible after receipt of the Settlement Sum". This is in contrast to the Claimant's obligations in clauses 1 and 4 where no such provision is made. If the parties had intended the obligation to withdraw the Claim to be dependent upon the First Defendant's performance of clause 2 they could and would have done so, as they did for the obligation in clause 3.

8. The obligation in clauses 1 and 4 may be further contrasted to those in clauses 7 and 9 concerning obligations of and to the Second Defendant, which are clearly expressed to be both (a) "subject to the conditions set out in paragraph 9 below" and (b) "conditional upon" the performance of other nominated obligations.

9. The Settlement Agreement was negotiated between commercial parties advised by solicitors.

10. Clause 12 is an entire agreement clause and it is not open to the Claimant to seek to rely on any pre or post contractual emails/correspondence/conversations.

11. The Claimant is given adequate protection by clause 3."

19. Mr Morshead submits that the consequence of being unable to obtain the declaration that is sought in the Claim would be that the main legal charge is worthless because it is secured on land where the intended development (without which the value of the land is nugatory) cannot be completed without the consent of the Second Defendant. For the main legal charge to have any value Helmsley must either obtain acknowledgment of the implied easements to which end the Claim is directed or obtain the Second Defendant's new consent to be bound by new easements over the Pink Land. Helmsley cannot compel the Second Defendant to grant new consent to be bound by new easements. This means that if Helmsley withdraws its Claim against the Defendants it has given up its chance to make its main legal charge worth anything and its security is of no practical use. This is the very vice that the Claim was intended to cure.
20. Mr Morshead argues that one must look at the Settlement Agreement as a whole. He submits that a reasonable person in the position of the parties would recognise that the whole bargain is predicated on the First Defendant raising funds from the "New Lender" identified in Recital (viii) and deploying those funds in the agreed fashion. He relies on the following points:

1. Recital (viii) is that "Mr Ali has secured funding". The whole agreement assumes the accuracy of that statement of fact and deals with the consequences of Mr Ali paying to Helmsley the funds which he claimed to have secured. The funding and the payment to Helmsley are the foundation of what follows.

2. All the obligations were and remain executory. Helmsley's obligation is to "withdraw" its claim. That expression is not a term of art and is not defined within the agreement. The agreement contains no express stipulation as to the time when Helmsley should withdraw its claim. Mr Morshead submits that the obvious and most logical time for the claim to be withdrawn is once the First Defendant has paid the settlement sum.

3. Other provisions in the Settlement Agreement assume that Helmsley has released its own legal charges which, in turn, is expressly dependent on payment having been made. This assumption appears from a reading of the Settlement Agreement as a whole and in particular the following:

i. The new lending from the New Lender could not be secured as a first legal charge in place (effectively) of Helmsley's first legal charge, until Helmsley had released its own legal charges. This was only to occur explicitly "after receipt" of the Settlement Sum. The New Lender's loan could not be a first charge unless and until Helmsley had released its own first charge. Without a new charge in favour of the New Lender, the Second Defendant's obligation to grant the required easements to the New Lender makes no sense.

ii. Helmsley is obliged to 'release' the Second Defendant from the deed of priority. But 'releasing' the Second Defendant from the deed would not (as it were) affect the priority of the charges were they to continue to subsist because, absent a release of the charges themselves, Helmsley would still have a first-ranking legal charge over the non- Pink Land and a second ranking legal charge over the Pink Land. The idea of the deed of priorities being 'released' is one which assumes that Helmsley has also released the charges whose priorities are regulated by the deed.

iii. The deed of priority also acknowledged that Helmsley had security over the entirety of certain fishing rights. The practical effect of a 'release', therefore, would be that the First Defendant became at liberty to charge the fishing rights to the Second Defendant, as was required of him under clause 9.4 of the Settlement Agreement. But this, too, would make no sense unless Helmsley had also released its security, because the First Defendant cannot charge the fishing rights to the Second Defendant, unless Helmsley has released those rights in favour of the First Defendant as well as the Second Defendant, i.e. by releasing its own substantive charges, following payment by the First Defendant.

4. Mr Morshead also submits that Helmsley is entitled to rely upon the draft Tomlin Order together with correspondence setting out the terms on which it was to be lodged as documents executed contemporaneously with or shortly after the Settlement Agreement and forming part of the same transaction, as an aid to construction of the Settlement Agreement. Helmsley's solicitor had proposed the lodging of a Tomlin order to give effect to the Settlement Agreement. She had also proposed that 'completion' of the agreement would entail not only 'completion' of the Settlement Agreement (in the sense of signing and exchanging it) but also receipt of the Settlement Sum. The Defendants both accepted that arrangement without contradiction.

21. I accept the First Defendant's submission that, because of the whole agreement clause, I cannot look at the Tomlin order and the connected correspondence to construe the Settlement Agreement. I must look at the Settlement Agreement as a whole to determine its true meaning and effect.
22. Whilst there are clearly some clauses of the agreement which are explicitly stated to create mutual obligations whereas the clauses in question have no such explicit statement of mutuality, I do not believe that this is an end of the matter. Since there is no statement in the agreement as to when the Claim is to be withdrawn the meaning of the clause requiring Helsmley to withdraw the Claim is capable of being construed in at least two ways. One, that the Claim must be withdrawn forthwith regardless as to whether the payment stipulated in clause 2 is made and, the second, that the Claim must be withdrawn when the payment stipulated in clause 2 has been made and not before. For this reason, it is necessary for me to look at these two possible meanings and seek to determine what it is that the parties intended by the wording. I accept Mr Morshead's submissions that to do this I must look at the Settlement Agreement as a whole and seek to give it a sensible commercial interpretation in the light of all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
23. In my judgment, it is important to take into account the fact that the whole Settlement Agreement is predicated on the fact that the First Defendant has secured the necessary finance from the New Lender. The securing of that finance has consequences so far as the releasing of the Claimant's charges and the deed of priority which do not make sense unless the money is paid by the First Defendant to the Claimant. I do not consider it a sensible construction of the terms of the Settlement Agreement that the obligation on the First Defendant to pay the £270,000 is independent of the obligation on the Claimant to withdraw the Claim.
24. Further, I believe that a construction of the Settlement Agreement that the payment of the £270,000 and the obligation to withdraw the Claim are mutually dependent is the only construction that accords with business common sense.
25. For these reasons and since the First Defendant did not and has not made the payment stipulated in the Settlement Agreement, I hold that the Claimant is not obliged to withdraw the Claim and is entitled to maintain its claim against the First Defendant.