Johnson & Anor v Secunda & Anor

This is an appeal against paragraphs 1 and 2 of the order dated 27 February 2009 of HHJ Dedman, in which he gave judgment for the respondents in the sum of £22,643.04 and ordered the appellants to pay the respondents’ costs of the action.

The facts are set out in some detail in paragraphs 1-15 of the judgments below and it is unnecessary to rehearse them at length in this judgment. In a nutshell, the parties entered into an agreement on 27 April 2005 (“the agreement”) under which the respondents were to take over the running of the appellants’ estate agency business [Town and Country Property Services, or “T&CPS”] for a period of twelve months, from 1 May 2005 to 30 April 2006, and were to have the option to purchase T&CPS at the end of that twelve-month period for £75,000. If the respondents did not exercise the option on 1 May 2006 the running of T&CPS would revert to the appellants.

Under the agreement the respondents were to receive 90% of the gross income and to pay for the running costs during the twelve months. The agreement made provision for commissions which were in the pipeline; that is to say, for business in hand on 1 May 2005. It is a feature of an estate agency business that commission will be “earned” when a sale has been negotiated, but it will not be actually received and entered on the books until the sale has been completed.

The relevant provisions of the agreement are as follows (the respondents are referred to as “SS” and the appellants are referred to as “PS” and “G”):

“1.

SS will take over the running of T&CPS for a period of 12 months from May 1^st 2005 until April 30^th 2006

2.

SS will invoice T&CPS for 90% of the gross income of T&CPS

3.

T&CPS will invoice SS monthly, in arrears, for the running costs including VAT

4.

After May 1^st 2005 any pipeline which has not exchanged will be divided equally between PS & G and SS

5.

SS will have the option to purchase T&CPS at the end of 12 months after May 1^st 2005 for a sum of £75,000.00 (Seventy Five Thousand Pounds). Should SS not exercise this option the daily running of T&CPS will revert to PS&G on 1^st May 2006”

The parties also, in March 2006, after the respondents had indicated an intention to exercise the option, entered into an addendum agreement. So far as relevant, that addendum agreement provided in clause 1 that:

“Any property sales where contracts have been exchanged prior to completion of the transfer of business shall entitle PS & [G] to retain 10% (plus VAT) commission”

The option was not exercised. The respondents, however, continued running T&CPS from 1 May 2006 until 3 July 2006, when they were required by the appellants to vacate the premises. The respondents commenced proceedings for breach of contract; their claim included a) a claim for the loss of a bargain, because they alleged that they had wrongfully been deprived of the opportunity to buy the business for £75,000; and b) a claim for loss of commission from the period from 1 May to 3 July 2006, that loss of commission representing commission in the pipeline, ie which had been “earned” by them during that period but which had not been received by the business during that period because the relevant sales had not been completed.

Following receipt of a jointly instructed accountant’s report which stated that the business was not worth more than at the most £10,000, the respondents’ claim for loss of a bargain was abandoned; thus the only live issue before the judge, apart from the question of costs, was the respondents’ claim for commission from 1 May to 3 July 2006. In respect of that claim the judge concluded in paragraph 24 of his judgment, dated 16 January 2009, that:

“It seems to me that, bearing in mind that at the end of the relationship between these parties the parties were essentially being put in the same position vis a vis each other but in reverse, if they had considered the point they would have been likely to arrive at the fairest solution between them which was what they had provided for in the first place, that is to say that in the case of pipeline commissions the fairest way was to divide the commission equally between them.”

On behalf of the appellants, Mr Walker submitted that, in so concluding, the judge had a) misconstrued the agreement and/or made a new bargain between the parties by implying a term into the agreement in circumstances where it was impermissible for him to do so.

Looking at the way in which the matter was put in the pleadings, the appellants’ defence and counterclaim stated in paragraph 3 that there were express terms of the agreement. The terms were then set out and they included in paragraph 3(4):

“by clause 4, any pipeline commission (being commission in respect of transactions which have been negotiated by TCPS prior to 1.5.05 but which had not by that date proceeded to exchange) would be divided equally between the Claimants and Defendants”

In paragraph 13, having referred to the fact that the option had not been exercised, the defence and counterclaim said this:

“Notwithstanding the fact that the Claimants had not purchased TCPS, the Defendants, in anticipation of the Claimants’ nonetheless purchasing TCPS in the near future, agreed to allow the Claimants to continue to operate TCPS and to remain in occupation of the ground floor premises for that purpose on such of the express and implied terms of the contract and addendum as were referable to the operation of the business and that occupation. The Defendants will refer to that arrangement as the ‘extended contract’.”

The reply and defence to counterclaim admitted in paragraph 3 the existence of those terms referred to in paragraph 3 of the defence, and in paragraph 10 admitted paragraph 13 of the defence and counterclaim and thus the existence of the “extended contract”.

In my judgment this “extended contract” was sufficient to extend clauses 1, 2, 3, 4 and 5 of the agreement above to cover the period from 1 May to 3 July 2006. I should note that it had been contended on behalf of the appellants before the judge that the agreement was unenforceable because it was an agreement for the transfer of an interest in land; an argument that was rejected by the judge. That could not be said of the extended agreement, which was merely concerned with the basis on which the parties had agreed that the respondents were going to continue to operate the business after the option date had passed.

Looking then at the terms of the agreement in the light of the extended agreement, clause 1 was simply the period during which the respondents were to take over the running of the business and was simply extended from 30 April 2006 until 3 July 2006. While it is perfectly true that no end date was specified in the agreement in respect of clauses 2 and 3, it is plain in my judgment that the entitlement to receive 90% of the gross income and the obligation to bear the running costs related to the period defined in clause 1; that is to say, originally the period of twelve months from 1 May 2005 until 30 April 2006, but extended by the extended agreement until 3 July 2006. So far as what was meant by gross income in clause 2, although Mr Colby on behalf of the respondents submitted that there was an ambiguity, I am unable to accept that submission. Given the nature of an estate agents’ business, gross income was a reference to the commission that was actually received and entered onto the business’s books during that period. That indeed is how it was treated by the parties during the period of twelve months covered by the agreement.

So far as clause 4 is concerned, there was no dispute that, as was contended in paragraph 34 of the defence and counterclaim, the reference to pipeline commission was a reference to commission in respect of transactions which had been negotiated by T&CPS prior to 1 May 2005, but which had not by that date proceeded to exchange. In practical terms, there would have been no pipeline left under clause 4 by 30 April 2006.

Although Mr Colby submitted that the parties had not addressed their minds to what the position would be in the event that the option was not exercised, that submission is belied by the terms of clause 5, the second sentence of which provides for precisely that eventuality:

“Should [the respondents] not exercise this option, the daily running of T&CPS will revert to [the appellants] on 1 May 2006.”

It will be noted that, although it would have been possible to include a proviso dealing with any pipeline that was in existence at that date, no such proviso was included. There is simply no equivalent of clause 4 to the effect that after 30 April 2006 any pipeline which has not exchanged will be divided equally between PS and G and SS. It is to be noted that the parties did consider what might happen in respect of pipeline in the event of there being a transfer of the business (see clause 1 of the addendum agreement). They did not, however, make provision for a comparable provision in the event of the transfer of the business not proceeding. Mr Walker’s short submission is that, in the absence of any such specific provision, the default position under the agreement as extended would apply, and that would not entitle the respondents to any pipeline that they had “earned” during the extended period but which had not actually been received by the business during that period. In my judgment that submission is correct. The respondents were running the business pursuant to the agreement until 30 April 2006. They knew that they had not exercised the option by the new date; they knew therefore that some new contractual basis would be required on which they were to continue to run the business if they wished to do so. On the pleadings it is clear that the parties did agree a new contractual basis for the continued running of the business, namely by simply extending the terms of the existing agreement and those terms did not make provision for any pipeline, save insofar as it related to commission in respect of transactions which had been negotiated prior to 1 May 2005 (see clause 4).

The conclusion in paragraph 24 of HHJ Dedman’s judgment, in my judgment, was in error. The judge made it clear that he was not purporting to interpret any term of any agreement that the parties had entered into. He was addressing his mind to a matter which the parties, in his view, simply had not considered, and was deciding what the parties might have agreed had they considered the matter. In carrying out that exercise, in my judgment the judge was creating a wholly new agreement for the parties where it was simply impermissible for him to do so. The parties had considered what the contractual arrangements between them should be for the extended period, and those arrangements simply did not include a term of the kind that was imposed by the learned judge.

It is perfectly true that the parties might have made such an agreement. It might have been fairer had they done so, but there was no need to imply such a term in order to give the extended agreement business efficacy, and in the absence of such a need it was not for the judge to supplement what had been agreed or had not been agreed between the parties themselves.

For those reasons I would allow the appeal on this ground and would vary paragraph 1 of the judge’s order that there be judgment for the claimant in the sum of £22,643.04. I will leave the precise figure that should be substituted perhaps for further submission by the parties.

The judge also ordered, as I have mentioned, the appellants to pay the respondents’ costs of the whole of the proceedings; that part of the order too must now be revisited.

In his skeleton argument Mr Walker submitted that, even if the appellant failed on the pipeline point, the judge would still have erred in principle in ordering the appellants to pay all of the costs, because a significant proportion of those costs had been incurred in respect of the loss of a bargain claim which had been abandoned on receipt of the accountant’s report. If my Lords agree with this judgment, the end result would be that the respondents failed not merely in respect of their loss of a bargain claim but also in respect of their loss of commission claim, and any order as to costs both here and below will have to reflect those conclusions.

I agree. This appeal turns on a very short point of interpretation of the agreement and its addendum. To my mind, it is perfectly clear that clause 2 of the agreement, when referring to “the gross income of T&CPS”, was referring to the income received during the original period specified in the agreement, namely the twelve months from 1 May 2005 until 30 April 2006, and the subsequent extension to July 2006.

Clause 2 provides that the respondents will invoice the business for 90% of its gross income. If the appellants did purchase the business, it is obvious that they would not be invoicing themselves for 90%. It is clear therefore that, at least on that scenario, the “gross income” in clause 2 could only be a reference to gross income during the period of the agreement itself - that is, from May 2005 until April 2006 and the subsequent extension to July 2006. The “gross income” in clause 2 cannot possibly mean two different things according to whether or not the purchase was completed. That interpretation of clause 2 is borne out by clause 1 of the addendum, which made specific provision for the appellants to retain 10% of the commission after completion of the purchase of the business by the respondents. It is also borne out by clause 4 of the agreement, which makes specific provision for the division of pipeline sums in respect of transactions carried out before the beginning of the contractual period, that is to say, before 1 May 2005.

The consequence is that, in the event specifically envisaged in clause 5 of the agreement, namely that the option to purchase was not exercised, there was no express provision in the agreement for the respondents to continue to share in the pipeline sums originating from transactions carried out during the period of their management of the business but not received until later. The issue therefore is whether, in order to give business efficacy to the agreement, it is necessary to imply a term that the respondents should continue to share in some proportion or other those pipeline sums. Contractual terms cannot be implied merely because it would be fair or reasonable to do so. Terms are to be implied in a contract only if it is necessary to give business efficacy to the contract, that is to say to enable the contract to work. In my judgment, there is no need to imply any such term in order to enable the agreement to work in the present case.

I would add, for the sake of completeness, that there was never any claim for rectification of the agreement in order to give effect to an intention expressed between the parties that pipeline sums received after the end of the contractual period but relating to transactions effected during that period should continue to be divided between the appellants and the respondents.

I agree with both judgments, and although we are disagreeing with the judge below I cannot, in deference to him, add much to what my Lords have said. So the appeal is allowed.