Pease & Anor v McMillan & Ors

This is an appeal, brought with permission granted by Rimer LJ, against part of an order dated 20 October 2008 made by Mr Recorder Akast sitting in the Cambridge County Court. The appeal is against the dismissal of a claim for damages for the alleged breach of a provision, dealing with the transfer of the benefit of subsidies, in a contract for the sale of a farm.

The contract, dated 6 July 2004, was for the sale of a freehold farm known as Gowers Farm, Stisted, Braintree, Essex, with an estimated total area of 215 acres, at a price of £1.53m. The sellers were the first and second respondents to this appeal, David William McMillan and his wife Freya Jeannie McMillan. The farm was subject to an agricultural tenancy in favour of the third respondent, W A McMillan Limited (the company), a company owned and controlled by Mr and Mrs McMillan. The sale of the farm was with vacant possession and the sellers agreed to procure the surrender of the company’s tenancy. The sellers continued to own and farm other property, and in fact retained some land which was included in the same Land Registry title as the property which was sold.

The appellants, who were the purchasers of Gowers Farm, are John Simon Frederick Pease and his wife Carole Ann Pease. They already lived and farmed at a nearby property in Stisted.

As the appeal relates to the provision in the contract dealing with the transfer of the benefit of farm subsidies, it is necessary to look first at the essential features of the subsidies.

The relevant subsidy scheme is the Single Payment Scheme which was agreed by EU member states in 2003 under the Mid-term Reform (originally called the Mid-Term Review) of the Common Agricultural Policy. The framework was contained in Council Regulation (EC) No 1782/2003 of 29 September 2003 (the 2003 Council Regulation), with detailed rules contained in Commission Regulation (EC) No 795/2004 of 21 April 2004 (the 2004 Commission Regulation). The most significant feature of the single payment scheme was that direct payments to farmers were no longer to be linked to the maintenance of any specified level or type of agricultural production.

The 2003 Council Regulation provided that a scheme of single payments would replace many of the subsidies then paid to farmers. Recital (29) stated that the single payment should be established at farm level. Aid under the new scheme was to be paid in respect of payment entitlements accompanied by an equal number of eligible hectares: art. 36. In order to determine the payment entitlement, there was to be calculated the “reference amount” which was the three-year average of the total amounts of subsidy paid to the farmer in each year of the reference period of 2000-2002: arts. 37 and 38. The farmer would become entitled to a payment entitlement per hectare which was calculated by dividing the reference amount by the three-year average number of all hectares which in the reference period gave right to the subsidies: art. 43. The payment entitlements per hectare were not to be modified save as otherwise provided: art. 43(4). Farmers were required to apply for their payment entitlements by 15 May in the first year of application of the scheme, which was 2005: art. 34.

For each member state, the sum of the reference amounts could not exceed a national ceiling specified in the 2003 Council Regulation and, if necessary, this was to be achieved by a reduction of the reference amounts: art. 41. Member states were entitled to decide by 1 August 2004 to apply the single payment scheme at a regional level and to subdivide the ceiling fixed under art. 41 between the regions: art. 58. Member states were entitled to divide the whole or part of the regional ceiling between all the farmers with holdings in the region concerned by reference to the number of eligible hectares. In this way member states could establish a single payment system which linked the single payment to each farmer either wholly or partly by reference to the number of hectares held by him as opposed to the payment entitlements calculated under art. 43. By way of exception to art. 43(4), member states could decide by 1 August 2004 that entitlements were to be subject to progressive modifications according to pre-established steps and objective criteria: art. 63(3).

In the United Kingdom implementation of the new system was largely within the scope of the devolved powers of each part of the UK. The system adopted for England took advantage of both the regional option under arts. 58 and 59 and the option for progressive modification of entitlements under art. 63 (3). In England, there will by 2012 be a flat rate payment per hectare in each of three regions. The rate will differ for each region but within each region farmers will receive the same rate for each hectare of eligible land. In order to give farmers time to adapt their businesses to the new system, there is a transitional period ending in 2012 during which payments contain a reducing element that is linked to their payment entitlement calculated under arts. 37 and 38 of the 2003 Council Regulation by reference to their subsidy receipts in 2000-2002 (the historic element). In the first year the flat rate comprised 10% of the payment and the historic element 90%, and over the following years these components are gradually reversed so that by 2012 the entire payment will be the flat rate. The decision on the system to be adopted for England was taken after an extensive public consultation in 2003-04 and was communicated to the European Commission on 31 July 2004. Legislative effect was given to it by the CAP Single Payment and Support Schemes Regulations 2005 (S1 2005 No. 219).

As already mentioned, the 2003 Council Regulation provided a single opportunity to apply for payment entitlements, by 15 May in the first year of operation of the scheme. As 15 May 2005 was a Sunday, the deadline was extended in England to 16 May 2005. We were told that amendments to applications could be made without penalty by 31 May 2005 and subject to penalty by 10 June 2005. In England, applications were made to the Rural Payments Agency (the RPA), an agency acting on behalf of DEFRA. A brochure published by DEFRA and the RPA in November 2004 explained how the system was to operate in practice. To receive payment under the single payment scheme (SPS), land had to be registered on the Rural Land Register maintained by the RPA. On each hectare of eligible land declared by a farmer on his SPS application for 2005, he would receive an entitlement to claim a payment under the SPS. The entitlement would comprise the historic element and the flat rate element, their proportions changing in the years to 2012, all as described above. Entitlements could in general only be established in 2005.

As the allocation of payment entitlements was linked to the applicant’s subsidy receipts in the reference period, the entitlement of an applicant who had not occupied the land in that period would in principle be limited to the element based on his occupation in 2005. He would not receive the benefit of the element based on subsidy receipts. This would affect farmers who had inherited or bought the land in question since 2002 or who had incorporated a farming business previously carried on by them personally on the land. To deal with these situations, specific provisions were included in the 2004 Commission Regulation. Art. 17 of the 2004 Commission Regulation made provision in relation to sales. Under the heading “Private contract clause in case of sale” it provides:

“1.

Where a sales contract concluded or modified by the last date for lodging an application under the single payment scheme in its first year of application at the latest stipulates that all the holding or part of the holding is sold, in full or in part, together with the payment entitlements to be established in accordance with Article 43 of Regulation (EC) No 1782/2003, in respect of the hectares of the holding or part of the holding transferred, the sales contract shall be considered as a transfer of the payment entitlements with land within the meaning of Article 46 of that Regulation subject to the conditions provided for in paragraph 2, 3 and 4 of this Article.

2.

Articles 42(9) and 46(3) of Regulation (EC) No 1782/2003 shall apply, where the case may be, to the payment entitlements to be calculated on the basis of the production units and hectares which were the object of the contract.

3.

The seller shall apply for the establishment of the payment entitlements in accordance with Article 12, adding to his application a copy of the sales contract and indicating the production units and the number of hectares for which he intends to transfer the payment entitlements. A Member State may allow the buyer to apply on behalf of the seller and with the explicit authorisation of the seller for the establishment of the payment entitlements in accordance with Article 12. In this case the Member State shall verify that the seller fulfils the eligibility criteria provided for in Article 33 of Regulation (EC) No 1782/2003 and in particular the condition referred to in Article 12 (5) of this Regulation.

4.

The buyer shall apply for payment under the single payment scheme in accordance with Article 12, adding to his application a copy of the sales contract.

5.

A Member State may require that the applications of the buyer and of the seller are lodged together or that the second application contains a reference to the first one.”

The conditions of art. 17 which required compliance if the purchaser was to be able to claim the payment entitlement, were therefore as follows. First, the seller had to remain a farmer: see the last sentence of art. 17(3). Secondly, the contract of sale had to be concluded or modified by 16 May 2005. Thirdly, the contract as concluded or modified had to stipulate that all or part of the holding was sold, in full or in part, together with the payment entitlements in respect of the hectares sold. Fourthly, the seller, or the buyer with the authority of the seller, was required to apply for the establishment of the payment entitlement, supplying a copy of the sales contract and indicating the production unit and area for which he intended to transfer the payment entitlements. Fifthly, the buyer must apply for payment under the single payment scheme, again supplying a copy of the sales contract.

Gowers Farm was offered for sale in March 2004. The sellers, or at any rate their agents Strutt & Parker, were aware of the Mid-Term Review of the Common Agricultural Policy and the particulars of sale contained the following under the heading Mid-Term Review:

“At Gowers Farm, about 187.32 acres (75.81 ha) have been declared as eligible for Arable Area Payments. Copies of the cropping records and the field data printout forms are available for inspection.

In respect of discussion within the European Union about proposed changes to the Common Agricultural Policy under the Mid Term Review, the vendors will support the transfer of their subsidy entitlements in respect of the land being offered for sale at Gowers Farm to the purchaser.”

This was substantially repeated in the heads of terms, expressed to be subject to contract, signed on 19 April 2004 by the sellers’ agent.

The contract of sale dated 6 July 2004 contained in cl.13 the terms as to the transfer of the benefit of subsidies. The reference to “the Company” is to W A McMillan Limited. Cl.13 provided:

“Agricultural subsidies

13.1

The Company shall be entitled:

13.1.1

to retain all arable area aid payments for the Property arising out of the Integrated Administration and Control Systems claim form submitted prior to the 15 May 2004 for the 2004 harvest crop;

13.1.2

to retain all set aside payments and other agricultural subsidies in respect of the Property for the 2004 harvest year; and

13.1.3

to retain all arable area aid payments, set aside payments and other agricultural subsidies for the Property in respect of the harvest years prior to the year 2004 and any agri-monetary compensation top-up payments in respect of the Property for those years and the year 2004 which may remain outstanding.

13.2.1

The Buyer shall on completion retain out of the balance of the purchase monies payable on completion in a suspense account with the Buyer’s Solicitors the sum of £18,700 (Eighteen thousand seven hundred pounds) (“the Area Payments Fund”) in respect of all IACS payments and other agricultural subsidies in respect of the Property for the 2004 harvest year;

13.2.2

The Seller shall notify the Buyer’s Solicitors in writing (“the Notice”) within ten working days after the payment notification for the 2004 harvest year is received by the Company and shall with such Notice provide copies of all covering correspondence and evidence of the amount of the full payment entitlement excluding any reductions or penalties applied as a result of errors in the Company’s application;

13.2.3

The Seller (as agent for the Company, which the Seller warrants that the Seller is and will remain at all times for this purpose) hereby irrevocably authorises and instructs the Buyer’s Solicitors to pay to the Buyer within two working days of receipt of the Notice out of the Area Payments Fund a sum equal to the amount of the full payment entitlement;

13.2.4

The Buyer hereby irrevocably authorises and instructs the Buyer’s Solicitors to pay to the Seller within two working days of receipt of the Notice the balance of the Area Payments Fund;

13.2.5

The interest actually accrued on the Area Payments Fund in the hands of the Buyer’s Solicitors shall be paid to the Seller and to the Buyer in the proportion which the payments made pursuant to clauses 13.2.3 and 13.2.4 bear each to the other;

13.2.6

In the event that the Notice is not served by the Seller before midday on the 31^st January 2005 the Seller (as agent for the Company, which the Seller warrants that the Seller is and will remain at all times for this purpose) hereby irrevocably authorises and instructs the Buyer’s Solicitors to pay the Area Payments Fund (with all interest actually accrued in the hands of the Buyer’s Solicitors) to the Buyer.

13.3

The Seller will use all reasonable endeavours to procure that the Company will, at the Buyer’s expense, take all action reasonably requested by the Buyer to ensure that the benefit of all arable area aid payments, set aside payments, other agricultural subsidies or quotas and single farm payments properly attributable to the Property for the 2005 harvest year and subsequent years passes to the Buyer.”

The effect of cl.13.1 was that the company was to retain all subsidies in respect of 2004 and earlier years. The effect of cl.13.2 was that the buyers were entitled to retain out of the purchase price a sum equal to the subsidies for 2004 up to a maximum of £18,700.

This appeal is concerned with cl.13.3 which deals with 2005 and subsequent years. The buyers’ claim before the Recorder, which he dismissed, was that the sellers had failed to comply with their obligations under cl.13.3, with the result that the benefit of the historic element of SPS payments for 2005 and subsequent years had not passed to the buyers, so entitling them to damages for breach of contract.

Essentially two issues arise. First, as a matter of construction of cl.13.3, does it include the historic element of SPS payments for the 2005 and subsequent harvest years? Secondly, if it does, did the sellers in breach of cl.13.3 fail to use reasonable endeavours to procure that the company took all action reasonably requested by the buyers to ensure that the benefit of the historic element of the payments passed to the buyers? The focus here is on what, if any, steps were reasonably requested by the buyers.

The Recorder decided the claim against the buyers on the first of these issues. He did not consider the second issue. There were other issues raised by the buyers which the Recorder considered and rejected, from which there is no appeal. These were a claim based on misrepresentation by reference to the particulars of sale and the heads of terms and, it would appear, a claim that there was a subsequent contract dealing with the subsidies.

The Recorder dealt shortly with the construction point, and largely by reference to the submissions of counsel for the sellers. Having set out or referred to the provisions of cl.13, he said at paragraph 12 of his judgment:

“Well, it seems to me my first task here is to decide on the plain meaning of those clauses. Cutting through a lot of detail I think Mr Monnington is right and I broadly adopt the arguments he has most recently put forward on this topic appearing on p.4-7 of his final closing submissions. As a matter of construction, it seems to me, para 13(1) deals, as I have indicated, with the company’s entitlements and (just to make it clear, as I have also pointed out, when I was reading these out just before) the word “retain” appears in each clause and it seems to me that taken together (and, indeed, taken separately) those sub-clauses plainly distinguish between entitlements for different years. Clause 13(1) (iii) seems to me could not be plainer. It distinguishes plainly between the years before 2004 and any outstanding payments for that year and prior years. 13(3), as I have indicated, is pretty clear, is a best endeavours clause. It embraces, it would seem, the subsidies – some, no doubt, preceding the introduction of the SFP but relevant to 2005 harvest year and succeeding years. I do not construe that: a) as being in any conflict with any part of clause 13(1) nor, and partly because of that, b) am I able to put any construction upon it to the effect that the part restriction to the 2005 harvest year necessarily imports prior subsidies for earlier years of an historic nature. As I say, it seems to me that clause 13(1) covers those and I am unable, therefore, to construe 13(3) in the way suggested by Mr Leckie. I would add that, of course, no difficulty would have arisen in drafting a clear provision, as appears from the draft clause I have been supplied with, but it was not done.”

The draft clause to which the Recorder refers at the end of that passage is a draft standard form “private contract clause” in the form of a deed produced by the Agricultural Law Association in, as we were told, September 2004.

The submissions of Mr Monnington for the sellers before the Recorder, which he repeats on this appeal, may be summarised as follows. First, cl.13.3 does not, as required by art.17 of the 2004 Commission Regulation, stipulate that the holding was sold with the historic element of the SPS payments. The mere reference to single farm payments is insufficient and will not enable DEFRA or the RPA to know for certain who was entitled to the historic element. There must be stated in terms that the holding is sold with the historic element. Secondly, cl.13.3 does not in any event stipulate that the holding is sold with any entitlement, as it does no more than require the sellers and, through them, the company to take reasonable steps as required by the buyers to transfer the benefit of the single farm payments. Thirdly, cl.13.1.3 is at odds with an intention, or stipulation, that the buyers are to take the historic element. It provides that the company is to retain the subsidies in respect of 2004 and prior years, which include the reference period of 2000-2002. This precludes a construction of cl.13.3 which entitles the buyers to obtain the benefit of payments made by reference to production in the reference period.

In common with the submissions of Mr Leckie for the buyers, I am unable to accept Mr Monnington’s submissions and the Recorder’s judgment as regards the construction of cl.13.3. I take in turn each of the principal submissions summarised above.

First, as a matter of construction of cl.13.3, without considering whether it is a stipulation complying with art. 17 of the 2004 Council Regulation and leaving aside the third submission, its terms in my judgment encompass the entirety of the SPS payments, without distinguishing between the two elements or excluding one of them. It extends simply to “all … single farm payments properly attributable to the Property”. It includes therefore the entirety of such payments. Mr Monnington did not submit that the historic element was not “properly attributable to the Property”, and he was right not to do so, in the light of the provisions of the European and domestic Regulations.

The second submission is, in my judgment, correct to the extent only that cl.13.3 is not itself a stipulation complying with art. 17 of the 2004 Commission Regulation. It does not follow, however, either that it does not create an enforceable obligation to transfer the benefit of the SPS payments including the historic element following a reasonable request to do so or that the mechanism then used for that purpose will not comply with art.17. As a matter of English law, cl.13.3 creates an enforceable obligation of an entirely unexceptional character to use reasonable endeavours to comply with a reasonable request. If an appropriate document complying with art.17, such as for example the standard form deed, is executed pursuant to a request under cl.13.3, it would be a stipulation as contemplated by art.17. Art.17 requires that the sales contract, as concluded or modified by the relevant date, should stipulate for the sale of the holding with the payment entitlements. The standard form deed does precisely that, as no doubt could other documents. Where it is executed pursuant to a provision such as cl.13.3, it would be an unacceptably narrow reading of art.17 to say that it was neither a stipulation of the contract nor a modification of it. Art.17 is directed to the question whether as a matter of substance the holding is sold together with the relevant payment entitlements.

The third submission fails to distinguish the years for which SPS payments are made and the years by reference to which they are in part calculated. The SPS payments, including their historic element on the declining basis until 2012, are paid for the 2005 and each subsequent harvest year. 2005 is the first year for which they became payable. They never were payable for or in respect of any earlier years and cl.13.1.3 therefore has no application to them. The fact that the historic element of the SPS payments is calculated by reference to the years 2000-2002 does not take that element out of cl.13.3 or into cl.13.1.3.

For these reasons, I would hold that cl.13.3 creates an enforceable obligation with respect to the benefit of the historic element of the SPS payments for the 2005 and subsequent harvest years, capable of giving rise to an effective transfer of such benefit. Accordingly, in my judgment, the Recorder was wrong in his conclusion on this issue.

It is therefore necessary to consider the second issue. The sellers’ obligation under cl.13.3 arises only when the buyers reasonably request them to procure the company to take action to ensure that the benefit of the payments passes to the buyers. Only if the buyers alleged and proved a reasonable request for such action and a failure to use all reasonable endeavours in response to it can the buyers establish a breach of contract and an entitlement to damages.

In the course of his oral submissions, Mr Leckie seemed to suggest that the sellers were under an obligation to take such steps on their own initiative and without any prior request by the buyers. Any such submission cannot be reconciled with the terms of cl.13.3.

Perhaps consistently with that submission, the case pleaded by the buyers in their particulars of claim did not allege, either in general terms or with any particulars, any request by the buyers to the sellers for steps to be taken under cl.13.3. There is simply an allegation in paragraph 8 that the sellers “have neglected and refused to procure the necessary transfers”.

Mr Leckie submitted that there were two occasions on which reasonable requests were made pursuant to cl.13.3, and that the sellers unreasonably refused each request.

The first request was said to have been made in May 2005. It is common ground that before then the buyers and their agents took no steps as regards the SPS payments for Gowers Farm, not even enquiring as to the subsidies received during the reference period. It is also common ground that the buyers did not put forward a private contracts clause for execution by the sellers. On 12 May 2005 the buyers’ agent contacted the sellers’ agent for details of the entitlement to be transferred. Given that the deadline under art.17 of the 2004 Commission Regulation to enter into a private contracts clause was 16 May 2005, this was a perilously late enquiry. Even if, as suggested to us, the deadline was extended to 31 May or 10 June 2005, not a great deal of time was being allowed for action to be taken. There is little or no evidence before us as to the events after the approach on 12 May 2005. Mr Leckie told us that the sellers broke off discussions, so that it was pointless to proceed further. He submitted that this conduct was unreasonable and therefore in breach of contract. Mr Monnington disputed that the sellers had broken off discussions. Mr Leckie could not point to any evidence which established that the sellers had done so. The Recorder touches briefly in paragraph 6 of his judgment on the events of May 2005 but does not mention any refusal by the sellers to discuss or negotiate with the buyers.

Without either a finding by the Recorder or the evidence to support it, it is impossible to conclude that the buyers unreasonably refused any requests by the sellers under cl.13.3 or unreasonably refused to co-operate with the buyers in or about May 2005. The buyers cannot therefore succeed by reference to the events of May 2005.

On this appeal, the buyers rely on a proposal made in February 2007 as the second occasion on which they made a reasonable request to the sellers for the purposes of cl.13.3. It is common ground, that by the deadline in May 2005, the sellers claimed the historic element relating to Gowers Farm as part of their entitlements. In November 2006, the buyers engaged Mr Simon Ward, a consultant in the agricultural industry, to advise and assist them on the issue of the subsidies for Gowers Farm. In February 2007, Mr Ward proposed to Strutt & Parker as the sellers’ agents that there should be a swap of high value entitlements by the sellers for low value entitlements from the buyers, the difference in value enabling the buyers to recoup amounts equal to past and future SPS payments.

This was not, however, put forward at the trial as being a reasonable request to take action under cl.13.3. It was not mentioned in these terms in the closing submissions for the buyers nor, save in a footnote, in those for the sellers. It was not therefore considered by the Recorder and there is no evidence on which to assess whether the request was reasonable. In the course of argument, Mr Monnington suggested some grounds for saying that it was not a reasonable request. These were issues for evidence and consideration at trial but as this request was not, it appears, part of the buyers’ case, these issues were not considered. In these circumstances, the buyers cannot succeed on appeal on the basis of an unreasonable refusal to take action in February 2007.

It appears from Mr Ward’s witness statement that his proposal for a swap was put forward as a substitute for the sellers simply making payments to the buyers equal to the relevant SPS payments which had been or would in the future be paid to the sellers.

From this it may be said that, in default of an effective transfer of the entitlement to the single farm payments, cl.13.3 imposed an obligation on the sellers in effect to account to the buyers for the SPS payments received by them, if reasonably requested by the buyers. Although suggested by Mr Leckie in his oral submissions on this appeal, this never formed part of the buyers’ pleaded case nor was it put forward at trial, nor on the evidence was it ever as such requested. For these reasons, it cannot form a basis on which the buyers can succeed on this appeal. An issue might arise as to whether in the particular circumstances the request if made would be reasonable. It is unnecessary to decide whether such a request, if it had been made, would in any event be within the contemplation of cl.13.3. I have very considerable doubts that it would be. While read on their own the words “to ensure that the benefit of all….single farm payments…..passes to the Buyers” are capable of requiring the payment to the buyers of sums equal to the SPS payments received by the sellers, the context suggests that this is not within cl.13.3. Clause 13.3 is a provision to take, at the buyers’ expense, action reasonably requested by the buyers. In this context, action to ensure that the benefit of the SPS payments passes to the buyers more naturally encompasses such transfers of the payment entitlements as would be permitted by the regulations. This reading is consistent with the particulars of sale and heads of terms. If it had been intended to impose a payment obligation, it is likely to have done so in clear terms.

In conclusion, it follows that in my judgment the Recorder was wrong in his construction of cl.13.3 but, because no reasonable request to take action under cl.13.3 has been established, no claim arises for breach of contract and the appeal must be dismissed.

I agree with the judgment of David Richards J, and that the appeal should therefore be dismissed.

I also agree with the judgment of David Richards J, save for one minor point. I do not share the doubts expressed by him in [35] about the meaning of the words “to ensure that the benefit of all single farm payments passes to the Buyer” in clause 13.3. The Seller undoubtedly receives a “benefit” if the Rural Payments Agency pays him a single farm payment referable to a year subsequent to the sale. The parties would surely not have intended to exclude that straightforward case from the obligation to account to the Buyer. The conclusion is supported by the fact that clause 13.3 does not use the word “transfer”, but the wider word “passes”. The action which the Seller would in this instance be required to make is to pay the sum over to the Buyer. I make this point as this kind of clause may be commonly used in farm sales. But I agree with Richards J that the meaning of this expression does not have to be decided on this appeal and should be left open for a case where this point is in issue.