Quest Advisors Limited Sharriba Ltd v McFeely & Anor

This is the latest episode in a long-running dispute about the grant of some leases. On 4^th March 2005 Quest Advisors Limited (“Quest”) entered into an agreement (“the Contract”) with Mr Thomas McFeely (Mr McFeely”) for the sale to him of a freehold site at 160/188 High Street, Stratford, London E15 which is close to the Olympic stadium and village. In February 2005 planning permission had been granted for the development of the site by the construction of a large block of flats with commercial shop units on the ground floor. I shall refer to this as the Development.

The sale price under the Contract was £12.745m but under clause 17 Mr McFeely also agreed to grant back to Quest or as it directed eight leases of the ground floor commercial space for terms of 999 years at a peppercorn rent. The leases are therefore extremely valuable because they entitle Quest or its assignees to receive the entirety of the rental value of the premises. It is also, I think, common ground that rental values have risen in the area in anticipation of the revenues which are expected to be derived from the location in Stratford of the 2012 Olympic Games.

Under clause 18 of the Contract Quest agreed to pay to Mr McFeely a contribution towards the building costs of the Development. Clause 18.3-5 provides that:

“18.3

The Seller hereby agrees to pay or procure to be paid by the appropriate lessee to the Buyer on the grant of the said lease or leases (and as a condition precedent to the grant of such lease or leases) a contribution towards the building costs of the Development equating to EIGHT HUNDRED AND FIFTY POUNDS (£850.00) per square metre (plus VAT where applicable) of the cost of construction of the commercial element of the Development specified above in accordance with the Outline Specification together with such sum as represents the cost of any variations to the Outline specification agreed by the parties to this Agreement (plus VAT where applicable).

18.4

The contribution shall be paid in three stages by or on behalf of the Seller as follows:

(a)

on completion of the shell and superstructure to the second floor: one third of the total cost plus VAT

(b)

on completion of the construction of the shop front and the envelope of the Building: one third of the total cost plus VAT

(c)

on Practical Completion of the whole Development AND on the grant of the lease or leases: one third of the total cost plus VAT

18.5

The Buyer agrees to allow the Seller or those authorised by or on behalf of it to have access to the said commercial element at all reasonable times for the purposes of carrying out fitting works and all other related matters to the commercial accommodation.”

The obligation of Mr McFeely to grant the leases is stated in clause 17 to be:

“Subject to the payment of the sums referred to in clause 18 below on or before completion of the Development to be constructed by the Buyer or its successor in title at the Property…”.

Completion of the sale took place on 29^th July 2005 and in February 2006 Mr McFeely was registered as the proprietor of the Development. On 3^rd October 2006 Quest executed a deed of assignment in favour of Sharibba Limited which purported to assign to Sharibba all of its rights and obligations under the Contract. Notice of the assignment was given to Mr McFeely’s solicitors on the same day and they were asked to acknowledge receipt. No formal acknowledgement was given and in July 2007 chasing letters were sent.

This led to lengthy correspondence between Quest’s solicitors and Merriman White who had by then been instructed to act for Mr McFeely and his brother who had become the joint owner of the Development. In April 2008 a meeting took place at which Mr McFeely indicated that he would like to buy back the ground floor commercial space but nothing came of this. Instead the parties became involved in a protracted dispute about whether Quest had repudiated the Contract which, in its various forms, has continued to this day.

Following the meeting Quest’s solicitors requested access to the ground floor in order, they said, to begin the marketing process. No response was received and on 30^th April 2008 a further letter was sent asking for details of the Development in order to calculate the first stage payment which fell due when the shell and superstructure to the second floor had been completed. The response from Merriman White was to challenge the legality of the assignment and to suggest that Quest (which is a British Virgin Islands company) had been struck off.

Against this background, on 24^th January 2008 Quest and Sharibba issued proceedings against the McFeelys seeking declarations that Quest had lawfully assigned its interest under the Contract to Sharibba and that the McFeelys were obliged to grant the leases. The defence which was filed raised various issues about the identity and status of Quest but also alleged that the purported assignment to Sharibba and/or the failure to make any stage payments under the Contract amounted to a repudiation. On the basis that the obligation to grant the leases was at an end, the McFeelys (in December 2008) also refused to grant access to the Development.

The immediate problem of access was resolved by Blackburne J who made an order for access on 13^th January 2009 and gave directions for an expedited trial of the action. There was an unsuccessful attempt by Quest in June 2009 to obtain judgment without a trial based on an unless order which the Master made in connection with the McFeelys’ disclosure. But this was dismissed by Floyd J who gave the defendants relief from sanctions. Its only significance is that the judge was told that the defendants intended to abandon the allegation of repudiation based on Quest’s failure to make the stage payments due under the Contract and he indicated that they should amend their defence accordingly. The action then came on for trial in July before Mr Robin Knowles QC (sitting as a Deputy Judge of the Chancery Division) and he handed down his judgment on 22^nd October 2009.

There has been no appeal against this decision and I can summarise the judge’s findings quite shortly. He rejected the defendants' claim that Quest was a different company from the contractual party. He accepted that the deed of assignment was not effective to transfer to Sharibba the obligations of Quest under the Contract. But he rejected the defendants’ submission that the attempt to do so amounted to a repudiation of the Contract. Quest’s reliance on the effectiveness of the assignment, once challenged, was subject, he held, to an acceptance that, if it turned out to be wrong, it would continue to perform its obligations under the Contract. It was therefore entitled to rely on the principle enunciated by the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR 277 that:

“Where one party, honestly but erroneously, intimates to the other reliance upon a term of the contract which, if properly applicable, would entitle him lawfully to rescind the contract, in circumstances which do not and are not reasonably understood to infer that he will refuse to perform his obligations even if it should be established that he is not so entitled, proceedings to decide that issue being in contemplation,” the other party will not be allowed to treat such conduct as a repudiation: Woodar v Wimpey (above) at 297B-C (per Lord Keith), 280G-H (per Lord Wilberforce) and 299E-G (per Lord Scarman).

The judge therefore rejected the defendants’ case based on repudiation and held that Quest was entitled to a declaration that the defendants were obliged to grant the leases in accordance with the Contract. He adjourned the question of the precise terms of the order to a further hearing. The major difficulty was how to tie in the grant of the leases with the payments due under clause 18. The judge explained the position which the parties had reached as follows:

“30.

Quest and Sharriba seek declarations that "on or before completion of the Development the Defendants are obliged to grant" the leases of the ground floor commercial space to Sharriba or as it may direct, or to Quest or as it may direct. The Claimants also seek "such further or other relief as is appropriate to give effect to the aforegoing declarations and to enforce the Claimants' right to the grant of the Leases."

31.

The Defendants point to the requirement under Clause 17 for payment of the sums referred to in clause 18. They say that the first stage payment has fallen due but has not been tendered, with the result that there is, as things stand, no obligation to grant the leases of the ground floor commercial space.

32.

It is useful to go immediately to the reason why the first stage payment has not been tendered. The contribution towards the building costs of the Development is, by Clause 18 of the Agreement, calculated on the number of square metres involved. There is no Outline Specification that gives a reliable guide. An indication is given as at 28 February 2007 that it would be of the order of 1130 square metres. It is a fact that the Defendants have at several points resisted the Claimants’ requests to come onto the Site to measure (as well as to check on quantity and quality of progress). Even at trial I did not feel that the Defendants, who are in a position to know, could give a reliable precise figure for the actual number of square metres.

33.

Quest will not enjoy the grant of the leases without paying for the contribution. Its concern in this litigation is that even if it pays, or tenders payment, it will be met with a refusal to grant the leases. I understand that concern, and am of the view that it is a genuine concern with some objective evidential foundation. The correct approach, subject to my conclusions on the other issues in the case, is for me to consider granting relief in a way that will declare the obligation to grant leases but make clear in so declaring that the obligation is conditional on payment.”

Counsel then produced drafts of the order. It is clear from the passage in his judgment quoted above that Mr Knowles was not concerned to make any decision himself as to whether the stage payments had fallen due or what were the consequences of non-payment. The defendants’ case that Quest’s failure to pay constituted a repudiation of the Contract had been abandoned. The order was therefore prospective in nature and was intended to declare the terms upon which the McFeelys were obliged to grant the leases.

The order which the judge made was in these terms:

“IT IS DECLARED that on or before Practical Completion of the Development, as defined in the Agreement made between the First Claimant and the First Defendant dated 4 March 2005 (“the Agreement”), the Defendants are obliged to grant to the First Claimant, or to such party or parties that it may direct, the Commercial Leases referred to in Clause 17 of that Agreement, provided that on or before the grant of such lease(s) the lessee(s) have paid to the Defendants the contribution towards the building costs of the Development (“the Contribution”), which Contribution is defined in Clause 18.3 of the Agreement.

IS IT ORDERED that:

1.

On or before Practical Completion of the Development, provided the First Claimant has paid to the Defendants the contribution towards the building costs of the Development (“the Contribution”), which contribution is defined in Clause 18.3 of the Agreement, the Defendants do forthwith grant to the First Claimant, or to such party as it may direct, a lease of the commercial space, as referred to in Clause 17 of the Agreement.

2.

There be liberty to the First Claimant and the Defendants to apply to enforce this order. If practical any such application to be made to Robin Knowles CBE QC (sitting as a Deputy Judge of the Chancery Division)…..”.

The references to the payment of the contribution (as defined) “on or before” practical completion were inserted by the judge in order to reflect more accurately the wording of the Contract. He also formulated the wording of the proviso in the second and third lines of the order. Beyond that, the draft produced by Mr Warwick remained as drawn.

The order was followed by requests for access to the Development but on 26^th November 2009 Merriman White wrote to Quest’s solicitors, Philip Ross, saying that both the first and the second stage payments had fallen due because the construction of the shop front and the envelope of the building was now complete. They asked for a transfer to their client account of £783,303.34 which included VAT on the first two stage payments. Philip Ross responded by saying that under paragraph 1 of the order of 22^nd October Quest’s contribution to the building costs under clause 18.3 had to be paid on or before practical completion and they asked for confirmation of when this was due. Merriman White’s position remained that this was only relevant to the third of the stage payments due under clause 18.4 and that the first two had already become payable.

It then, I think, became clear to both firms of solicitors that there was a disagreement between them as to the meaning and effect of the order of 22^nd October. Philip Ross’s position was that the order had effectively superseded clause 18.4 of the Contract and that Quest’s only obligation was to pay whatever was due by way of contribution on or before practical completion, in which event it would become entitled to the grant of the leases. Merriman White maintained that the terms of clause 18.4 continued to be effective because the order merely repeated the express conditions of the Contract. On 18^th December 2009 they demanded immediate payment of the first stage payment plus VAT and put Quest on notice that its failure to make such payment within 14 days would be treated as a repudiation of the Contract.

Philip Ross’s response was to repeat its argument that the order did not provide for stage payments but it also requested accurate measurements of the commercial space in order to calculate what the contribution should be. It will be recalled that clause 17 of the Contract refers in terms to the area to be contained in the leases and that the contribution payable under clause 18.3 at the rate of £850 per square metre is in relation to the commercial element of the Development in accordance with the outline specification as defined. To this end, they also arranged for a surveyor to inspect the Development on 13^th January 2010. In the meantime, however, no payment was made as requested by Merriman White. They wrote to Philip Ross on 12^th January saying that Quest’s refusal to make any payment short of practical completion demonstrated a clear intention not to be bound by the terms of the Contract and that their clients had accepted their repudiation. They added, for completeness, that the judge had neither the intention nor the jurisdiction to re-write the Contract for the parties in his order.

Parallel with this correspondence, the surveyor (Mr Robert Brown) inspected the Development. On 18^th January he produced a report of his visit in which he confirmed that the drawings attached to the outline specification did not match the construction drawings under the building contract and that the works so far completed did not therefore conform to the specification. In particular, the ground floor commercial area was impeded by a number of columns inserted to take the weight of the flats above which are not shown on the outline specification and an electricity sub-station is housed within the ground floor which again is not provided for. Quest’s evidence at the time was that there was a deficit of some 72 metres between the area shown on the building contract drawings (1,130 square metres) and the measurements specified in clause 17 of the Contract (1,202 square metres). This equated to some £61,200 in terms of the contribution payable. Mr Brown did, however, report that the Development was, as a whole, well progressed, although the commercial element was not yet finished beyond a shell and still had no shop fronts, windows or external doors.

To resolve the issue about the order and whether Quest had repudiated the Contract by failing to make the stage payments, both sides made applications to the court. Quest sought an injunction preventing the McFeelys from granting a lease of the commercial element of the Development to any other party and an order allowing it to carry out an inspection of the area and to take measurements. The McFeelys applied for a declaration that the Contract was at an end and for the revocation of the order of 22^nd October. On 10^th February 2010 Arnold J accepted undertakings from the defendants not to dispose of any of the commercial space; to give Quest 14 days’ advance notice of practical completion and to provide access for inspection and measurement. He stood the substantive applications over to an expedited hearing which took place before Lewison J on 1^st March. The order which Lewison J made is the first of the orders that are the subject of the present appeals.

In short, the judge held that the order of 22^nd October did not remove Quest’s obligation to make the stage payments but he dismissed the defendants’ application for a declaration that the Contract was at an end by reason of Quest’s failure to make at least the first of those payments. Their stance was, he said, based on their construction of the judge’s order of 22^nd October and, even though it was wrong, it did not amount to a repudiation of the Contract. The principle derived from the decision of the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd applied.

However, Lewison J also went on to order Quest to pay the sum of £600,000 (plus VAT) by 22^nd March 2010 on account of the first two stage payments. This part of his order arose as a result of exchanges which followed his judgment on the main issues of the construction of the order and repudiation. Mr Warwick explained to the judge (as he had to Mr Knowles) that Quest was concerned about making stage payments to the McFeelys in advance of the grant of the leases and suggested that any payments should be made into court or into a joint solicitors’ account. At the time the measurements of the ground floor of the Development were not agreed and Quest had the possibility not only of a set-off and reduction in the contributions to take account of the reduced area but in addition to that a claim in damages for the defendants’ failure to construct the Development in accordance with the outline specification.

Mr Mayall for the McFeelys was concerned that these disputes should not be used as a reason for delaying the first and second stage payments which he contended were now due and the judge therefore included in his order a direction requiring the McFeelys to provide a detailed explanation of when practical completion was expected to occur and the date when the works specified in clauses 18.4(a) and (b) of the Contract had been completed. But he suggested to Mr Warwick that unless the abatements attributable to the reduced floor areas were likely to reduce the contribution by a sum in excess of the third stage payment there was no reason for the first two payments not to be made.

He therefore ordered Quest to pay £600,000 plus VAT “on account of” the first two stage payments referred to in clause 18.4 of the Contract. In his ruling on the form of the order he said that:

“So far as the stage payments are concerned, my ruling was that in principle these remain payable, but since there has been no agreement and no determination of the precise measurements of the space, it is not possible, in accordance with the terms of the contract, to work out what those stage payments would be. Nonetheless, since in principle those sums remain payable, I do not think that strict adherence to the terms of the contract is necessary before I can make an order in aid of the working out of the order for specific performance.

As Mr Mayall points out, it is quite obvious that part of the purpose of the stage payments is to fund the completion of the development. In those circumstances, I consider that it is right, and will be a term of the order, that Quest pays the sum of £600,000 plus VAT on account of its obligations to pay the first and the second of the three stage payments.”

Both sides now appeal against the judge’s order. Quest challenges the judge’s ruling that the order of 22^nd October did not remove their obligation to make the stage payments specified in clause 18.4 of the Contract. The McFeelys appeal against the judge’s rejection of the contention that, by failing to make the stage payments in the period following the order of 22^nd October, Quest had repudiated the Contract. This appeal obviously falls away if Quest is successful in its argument about the effect of the order. The other matter to mention is Quest’s alternative appeal against the order for the payment of £600,000. In response to the McFeelys’ appeal on the repudiation issue, they contend that the judge was also wrong to order them to pay the £600,000.

As explained later in this judgment, there was no immediate attempt by Quest to appeal the order of Lewison J. The challenge to the £600,000 order was made by way of cross-appeal in a respondent’s notice dated 7^th December 2010. In the original respondent’s notice the sole ground of appeal was that this order could not stand if the effect of the order of 22^nd October was to remove the obligation to make stage payments. In that event nothing became due before practical completion of the Contract. But, as the argument developed before us, it became clear that part of Quest’s case was that Lewison J was wrong to order the payment of the £600,000 before an inquiry had established what was in fact due under clause 18.4 of the Contract. We therefore invited Mr Seitler QC to formulate an amendment to the notice to raise this point and the amended ground of appeal is that the judge was wrong to have ordered the £600,000 payment without first considering his jurisdiction to do so and in particular (as an interim payment) without considering and applying the criteria set out in CPR Pt. 25. Alternatively, he should have made an order in a lesser sum.

Mr Mayall opposed these amendments on grounds of lateness but they raise issues of law about the judge’s jurisdiction to make the order which, in my view, we ought to consider as part of this appeal. There is no prejudice to the defendants in having to deal with them except possibly in relation to costs and I propose that we grant permission to amend the respondent’s notice to include this ground of appeal. The point it raises is also directly relevant to the appeal and cross-appeal against the order of Mr Knowles made on 5^th May 2010.

Instead of seeking to appeal against Lewison J’s order for the payment of the £600,000 Quest applied to vary the order. The application was made under CPR 3.1(7) and sought the reduction of the payment to £300,000 and for this sum to be paid into court. The application was supported by a witness statement from a partner in Philip Ross (Mr Asif Ahmed) to the effect that the commercial space measured only 1,130 as opposed to 1,202 square metres; that the removal of features such as the sub-station will cost £534,000 plus VAT; that the deviations from the outline specification which cannot be rectified have depreciated the market value of the leases by a further £275,000. On this basis Mr Ahmed calculated that Quest’s contribution to the building costs would not exceed £162,100 and that the contribution in respect of the first and second stages should be £108,066.67 plus VAT. Against this, they had a set-off for some interlocutory costs of £25,703.54 thereby reducing their liability to £82,363.13.

Directions for the service of further evidence were agreed and the hearing of the application was adjourned by consent on that basis. The McFeelys contend that it was a term of those arrangements (though not a term of the agreed order for directions) that the £600,000 order by Lewison J should be paid. On 17^th March 2010 Merriman White wrote to Philip Ross approving the consent order but stating that it was returned signed on the strict understanding that the order of 1^st March remained fully effective. Their letter went on to say that a failure to pay the £600,000 by 22^nd March would be treated as a repudiation of the Contract. Philip Ross replied on 18^th March acknowledging that the order of 1^st March remained effective until varied.

On 22^nd March Merriman White provided the information required under paragraph 1 of Lewison J’s order. Practical completion was expected to occur on 4^th July 2010; the shell and superstructure to the second floor of the Development was completed in December 2007; and the shop front and envelope of the building was completed by about March 2009.

Quest then applied on 22^nd March to David Richards J for a stay of the order for the payment of the £600,000 pending the hearing of their substantive application to vary the order. The application was dismissed but the £600,000 remained unpaid. On 8^th April Philip Ross transferred to Merriman White’s client account the £82,353.13 (plus VAT) in accordance with the calculations in Mr Ahmed’s evidence and stated in a letter that Quest was taking steps to put them in funds for the balance of the £600,000 less the deduction on account of costs. Merriman White refused to accept the payment and notified Philip Ross that the McFeelys would apply to court for a declaration that Quest had repudiated the Contract. The application was issued on 14^th April and on 16^th April Mr Knowles heard both this and Quest’s application to vary the order for payment of the £600,000.

In his judgment of 5^th May Mr Knowles declined to vary the order for the payment of £600,000. He said that there was room to correct any overpayment when the time came for the final instalment on practical completion which, on the information before him, was only about three months away. He also declined to order the monies to be paid into court. But he went on to dismiss the McFeelys’ application for a declaration that, by reason of their failure to pay the £600,000, Quest had repudiated the Contract. His reasons (as set out in paragraph 26 of his judgment) were that:

“(1)

The Order made by Lewison J for payment of £600,000 was not an order specifying that the Order for specific performance would be lost if the payment was not made on time.

(2)

The Agreement did not make time for payment of stage payments “of the essence”, and nor did the Defendants seek to do so expressly in correspondence or ask the Court to do so.

(3)

Quest’s position was consistent with both the Agreement and the order for specific performance being on foot.

(4)

The payments are delayed stage payments and not a payment on completion; and there is no evidence of damage having been caused to the first Defendant by reason of the delay that cannot be remedied by the payment of interest.”

He therefore ordered Quest to make the payment of the £600,000 (subject to some adjustment for costs and interest) by 4 pm on 14^th May 2010. Etherton LJ, when giving permission to appeal, stayed this order pending the appeal.

Both sides appeal against the order. Quest contend that, in the absence of any evidence from the McFeelys to challenge Mr Ahmed’s assessment of the effect of the breaches of the Contract by them, the judge was wrong to refuse to vary the order so as to provide for the payment of a lesser sum. He was also wrong to ignore their concerns that any overpayment might not be refunded on completion. The defendants say that the judge had no jurisdiction to make the order sought under CPR 3.1.7 and Quest was clearly in contempt in failing to comply with Lewison J’s order once David Richards J had refused a stay. But they also challenge the judge’s ruling that there had been no repudiation by reason of the non-payment. Quest, they say, cannot honestly have believed that they were not obliged to make the payment by 4 pm on 22^nd March and the fact that Lewison J did not in terms specify that the benefit of the earlier order for specific performance would be lost if payment was not made is irrelevant. The order made by Lewison J was for the minimum sum that was due under the Contract and, by not complying with the order, Quest was in fundamental breach of the terms of the Contract.

The order of 1^st March 2010

The obvious starting place is to consider the judge’s construction of the order of 22^nd October 2009. It is unfortunate (to say the least) that the disagreement about what Mr Knowles intended to achieve by his order was not referred back to the judge himself. Instead it has developed into a major and costly dispute which has involved other judges and ultimately this court in attempting to construe the order. As part of this, fresh allegations have been made to the effect that Mr Warwick by his draft order in some way misled the deputy judge by not disclosing either to him or to Mr Mayall that the wording he proposed was intended to remove his client’s continuing obligation to make the stage payments.

This particular difficulty was in my view self-inflicted. As part of his submissions to Lewison J, Mr Warwick recalled at some length that his subjective intention in formulating the draft order was undoubtedly to crystallise his client’s liabilities under clause 18.4 into a single payment to be made on practical completion. This was, he said, consistent with the position then reached of an order for specific performance and the expected completion of the Development. He gave the judge a detailed account of the discussions which took place between him and Mr Mayall about the terms of the order and sought to explain how he believed they intended to deal with the issue of stage payments.

None of this was even remotely relevant to what the judge had to decide nor should Lewison J have been troubled with it. Mr Warwick’s recollections of what he intended the order to achieve are not admissible in relation to the construction of a disputed order any more than they would be admissible in relation to a dispute about the meaning and effect of a contract. Lewison J knew that the final form of the order was decided upon by the judge and he had to look at and construe the order in an objective fashion having regard to the judgment to which it was intended to give effect and to the matters to which it relates.

In my view that is precisely what he did. He says in terms that Mr Warwick’s subjective intentions are irrelevant. In his judgment he refers to the fact that the first of the triggering events had occurred but that there were remaining uncertainties about the area of the commercial space. The judge’s insertion into the declaration and into paragraph 1 of his order of the words “on or before” was (as explained in his reasons for the order) intended to tie it in with the obligation contained in clause 17 of the Contract. This is the obligation to grant the leases subject to the payment of the sums referred to in clause 18 of the Contract “on or before completion of the Development”.

That was clearly the appropriate form of the declaration, the purpose of which was to confirm the obligation of the McFeelys to grant the leases. The only claim before Mr Knowles was one by Quest for the performance of the Contract. There was no counterclaim by the McFeelys for the stage payments and they were not in issue in the proceedings. The verbal formula contained in clause 17 of the Contract has to be read compatibly with the obligations of Quest under clause 18.4 and I think that Lewison J was right as a matter of construction to find that the repetition of that formula in the declaration and order had no different effect. The order went no further than to deal with the issue which the judge was asked to decide.

There is, however, in my view a further and, I think, conclusive reason why the order made by Mr Knowles should not be read in the way that Quest contends. It is simply that the deputy judge had no power on an application for specific performance to dispense with or relieve Quest from its own obligations under the Contract. The most that he could do was to re-inforce the terms of the Contract with an order of the court for its performance. Any disputes about whether the payments had become due or in what amount might need to be resolved by an inquiry as part of the working out of the order but what the order could not do was to alter the terms of the Contract. I would therefore dismiss Quest’s challenge to the judge’s construction of the 22^nd October order.

That takes me to the McFeelys’ appeal against the judge’s rejection of their repudiation argument. The relevance of the decision in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd was a point taken by the judge himself. His reasons for rejecting Mr Mayall’s argument that there had been a repudiation are set out in paragraphs 26 and 27 of his judgment as follows:

“26.

In my judgment, Quest’s stance is explicable by their construction of the judge’s order, which, in my judgment, is a plausible construction, even though I have decided on balance that it is wrong. Moreover, as Mr Mayall himself put it, the liberty to apply provisions were there to deal with difficulties of working out the precise mechanics of the making of the stage payments, and I do not consider that it was open to the McFeelys simply to demand payment of a sum when the measurements had not been agreed and they had not gone back to the court under that liberty to apply to deal with the question of measurement, or indeed the question of precisely when the first stage payment should be made.

27.

I do not therefore consider that this is a case in which the court should dissolve the contract. The remedy for the McFeelys is to apply under the liberty to apply, to work out the precise mechanics and quantum of the stage payments.”

The judge’s reasoning is based on two premises. The first is the general principle endorsed by the majority in Woodar that a failure or refusal to implement the terms of a contract based only on a mistaken belief as to its terms will not, without more, constitute a repudiation. But the second premise is that, once the court has made an order for specific performance, the ability of the party with the benefit of the order to exercise his contractual rights under the contract (including that e.g. of serving a notice to complete) is circumscribed by the order. Although the Contract remains in full effect and is not merged in the judgment, the applicant has placed the supervision of its performance into the hands of the court. The rescission or the cancellation of the contract is therefore a matter for the court and can only be achieved by an order of the court dissolving the contract: see Singh v Nazeer [1979] Ch 474 at page 480; applied in Johnson v Agnew [1980] AC 367.

Mr Mayall accepts, as he must, these general principles. But the repudiatory conduct was, he submits, not the mere failure to make the stage payments that had become due but rather Quest’s denial that there was any subsisting obligation to make them. Even if the judge was right to allow the point to be taken at the trial without prior notice to the defendants, the Woodar conditions were not satisfied because Quest did not have an honest belief that the effect of Mr Knowles’ order of 22^nd October was that it no longer had any obligation to make the stage payments.

I have no doubt at all that the judge was entitled to raise the Woodar point at the hearing and to allow Quest to rely on it. If the late introduction of the point caused the McFeelys any difficulties in terms of their being able to deal with the point, Lewison J might have needed to consider an adjournment for further evidence. But, as far as I am aware, no adjournment was sought nor was there any reason for seeking one. Quest’s position in relation to the meaning of the order had been set out in the correspondence between solicitors which I have referred to, all of which was before the judge. Philip Ross responded to Merriman White’s letter of 18^th December 2009 which put Quest on notice of the defendants’ intention to treat the failure to pay as a repudiation by setting out their understanding of the order of 22^nd October and by asking for access to measure the Development and for the estimated date of practical completion. In their letter of 14^th January 2010 they confirmed their clients’ intention to proceed with the Contract. The judge clearly accepted that their refusal to make the stage payments was based on a genuine, albeit mistaken, belief about the effect of the earlier order.

The challenge to this finding is also based on the conduct of Mr Warwick. Both in the skeleton argument in support of this appeal and in his oral submissions Mr Mayall submitted that Quest can have had no honest belief that the stage payments were no longer part of the Contract. No positive evidence was, he said, placed before the judge to this effect and no reasonable lawyer could have concluded that this was the effect of the order. In particular, Mr Warwick told the deputy judge at the hearing on 22^nd October that paragraph 1 of his draft order was intended to do no more than to reflect the terms of the Contract. It was therefore inaccurate for him to suggest to Lewison J that the intention behind the draft order was to remove the provisions of clause 18.4.

This is not the first time that this criticism of Mr Warwick has been made. It was raised before Gross LJ at an oral hearing of the defendants’ application for permission to appeal the order of 1^st March and it led to the application being adjourned to an inter partes hearing which took place before Rimer LJ on 23^rd November 2010 at which Mr Warwick appeared. Having heard Mr Warwick, Rimer LJ expressed the view that he had not misled the judge and I have no reason to disagree with that conclusion.

Having read the exchanges between Mr Warwick and Lewison J, it is far from clear what the thought processes of Mr Warwick were at the relevant time and his attempt to explain them to us at the hearing of this appeal left me no wiser. I am, however, clear that it is not possible from this material to make any finding that the views expressed by Philip Ross in the correspondence I have referred to about their understanding of the meaning and effect of the order was anything but an accurate statement of their and their clients’ honest belief at the time.

In these circumstances, no basis has been made out for challenging the judge’s conclusion that the Woodar conditions were satisfied. The defendants’ argument can only succeed if it can be shown that Quest was intent on refusing to perform its obligations under clause 18.4 regardless of whether the order had relieved it of having to do so. The correspondence points to an opposite conclusion and most judges who have considered the construction of the order, including Lewison J and Rimer LJ, have conceded that Quest’s view of the matter is clearly arguable. It is not therefore necessary to consider Lewison J’s second reason for dismissing the defendants’ application: i.e. that it was not open to the McFeelys to demand the stage payments before the measurements had been agreed and the matter had been considered by the court. If the Woodar principle applies, there was no repudiation. I would therefore dismiss the defendants’ appeal against the order of Lewison J.

That leaves the cross-appeal against the order for the payment of the £600,000.

The first question is to identify the jurisdiction which Lewison J was exercising when he made the order. This is relevant not only to Quest’s challenge to the making of the order but also to the appeals against the subsequent order of the deputy judge which turn to some extent on whether the direction for the payment for the £600,000 was part of the order for specific performance.

The judge made it clear in paragraph 27 of his judgment quoted above that it was not possible to determine the amount of the stage payments without some further hearing to decide issues such as the measurement of the commercial space as built. The order for the payment of the £600,000 therefore required Quest to make the payment “on account of its obligations” under clause 18.4 subject to any new payment being adjusted on completion. It was not and could not therefore be an order in terms for the specific performance of clause 18.4 and has, I think, to be treated as an order for an interim payment under CPR 25.7.

An order of this kind may only be made if one of the conditions set out in CPR25.7(1) is satisfied. The only possibly applicable ones in this case were conditions (a) and (c), namely that the respondent to the application has admitted liability to pay damages or some other sum of money to the applicant or that if the claim went to trial the claimant would obtain judgment for a substantial amount of money against the defendants.

Mr Mayall submitted that the order was made on an agreed basis and that Mr Warwick was content to accept that any reductions in the clause 18 payments would not reduce the sum payable below the amount of the first two stage payments. But the truth is that Mr Warwick was taken by surprise by the judge’s suggestion of a payment on account and had not yet received the report from the surveyors which enabled Mr Ahmed subsequently to quantify Quest’s claim. It is not therefore realistic to treat paragraph 3 as an agreed order or to rely on any apparent admission of liability. Mr Warwick simply had no material on which to oppose the judge’s suggestion of a payment and the judge proceeded to make the order. This was not therefore a case of an admitted liability under CPR25.7(1)(a).

One difficulty about condition (c) is that the defendants had not counterclaimed for the amount of the stage payments. Under the original order of 22^nd October 2005 (and under the Contract) the grant of the leases is conditional upon payment of whatever is due from Quest under clause 18 and any disputes about the sum recoverable will need to be resolved by an inquiry as part of the working out of the specific performance order. This is what Lewison J himself suggested in his judgment of 1^st March. At the time when the order was made the judge had no comprehensive evidence about the condition of the property and we know, with the benefit of hindsight, that there is now a substantial dispute about the way in which the commercial space has been constructed and the alleged effect of that on the rental value of those premises.

Therefore, whilst I sympathise with the judge’s concern to see that something was paid by Quest on account, I consider that the judge was wrong to have dealt with the matter on a summary basis without notice to either party and in the absence of any application by the defendants. He ought, in my view, to have left it to the defendants to make an application for an interim payment if so advised. Such an application would have had to be supported by evidence about the state of the works and could not have taken place before the defendants had complied with the judge’s order to give Quest access to the premises for the purpose of inspection and measurement. The consequence would have been that the dispute which was later raised before Mr Knowles would have been raised in the interim payment proceedings and it is, I think, inconceivable that an order for the payment of £600,000 would have been made.

I would therefore allow Quest’s appeal on this point and vary paragraph 3 of the order of 1^st March 2010 by substituting for the figure of £600,000 plus VAT the sum of £136,396.46 plus VAT. This is the £162,000 which Quest (on Mr Ahmed’s evidence) concedes is likely to be payable less the £25,703.54 in respect of costs.

The order of 5^th May 2010

The consequence of this is that the appeal against the subsequent order of 5^th May becomes academic and it is unnecessary to consider whether Mr Knowles should have exercised his powers under CPR25.8 or under CPR3 to reduce the amount of the interim payment to the minimum sum for which Quest was prepared to accept liability. For the same reason we do not have to decide whether Mr Knowles was right to have entertained Quest’s application to vary or whether he should, as the defendants contend, have refused to hear the application until Quest had purged its contempt by paying the £600,000 in accordance with Lewison J’s order.

That leaves the defendants’ appeal against the rejection of their claim that Quest had repudiated the Contract by refusing to pay the £600,000 ordered by Lewison J. Mr Seitler QC accepted at the outset, as he must, that Quest has no excuses for having failed to comply with the order of 1^st March once David Richards J had refused to order a stay. I think that this conduct was ill-advised and a clear breach of the court’s order. But the present position, as I have mentioned, is that Etherton LJ has granted a stay of Mr Knowles’ order for the payment of the £600,000, although even that is mired in controversy with the defendants disputing Mr Seitler’s assurance (based on the contents of the written application) that Etherton LJ was told that David Richards J had earlier refused a stay of the original order.

None of this, however, is directly relevant to this particular appeal. I include in this the issue of whether the adjournment of the application to vary in March 2010 was agreed to by the defendants in return for an undertaking by Quest that the £600,000 would be paid. Nobody suggests that this in any way varied the terms of the Contract. For the defendants to succeed on their argument that the Contract was repudiated by reason of Quest’s failure to comply with Lewison J’s order they would, at the very least, have to establish that the order was one in terms for the performance of the clause 18.4 obligation. As I explained earlier, this is not the case. It was, at most, an order for an interim payment on account of what the defendants might recover as part of a final judgment. Although Quest’s breach of that order may render them liable to committal proceedings, I am unable to see how their non-compliance can be characterised as a repudiation of their contractual liabilities. Those fell to be determined in the current proceedings in which there is an active dispute as to what is due. I think Mr Knowles was therefore correct to reject the defendants’ claim. Mr Mayall also, I think, accepted that a successful appeal against the making of the 1^st March order for the payment of £600,000 probably has the consequence, in any event, that there was no repudiation. I would therefore dismiss this appeal.

In summary, I would therefore allow Quest’s appeal against paragraph 3 of the order of 1^st March and vary that part of the order as indicated. The sum of £136,396.46 should be paid to the defendants within 28 days. I would dismiss the defendants’ appeals against the orders of 1^st March and 5^th May 2010 on the repudiation issues; and I would make no order on Quest’s appeal against the order of 5^th May.

Practical completion has now taken place. The remaining task for both parties is therefore either to agree what sums are payable to the defendants under clause 18 as a condition of the grant of the leases or to submit those disputes to an inquiry for resolution. Any such inquiry should be before a judge of the Technology and Construction Court. The parties should therefore provide this court with draft directions for an inquiry which we will incorporate into our order.

I agree.

I also agree.