Family Mosaic Housing Association v Pimlico Schoolhousing Association Ltd

This is a somewhat unfortunate dispute between two not-for-profit bodies. The claimant, Family Mosaic Housing Association (“Family Mosaic”), is a substantial housing association, providing housing for some 45,000 people. The defendant, Pimlico School Housing Association Limited (“PSHA”), is far smaller. As its name suggests, it was formed with a view to providing housing for teachers at what was then Pimlico School.

The central issue between the parties is as to whether PSHA’s appointment as managing agent of a property at 63-67 St George’s Drive, London SW1 (“the Property”) has been effectively terminated by Family Mosaic.

The early history is explained in statements made by Mrs Edith Nikolaou and Ms Helen O’Malley. It seems that, in the mid-1970s, Pimlico School was interested in finding accommodation for its staff and involved its parent-teacher association. At much the same time, Family Mosaic, then the Family Housing Association, acquired a number of properties in the area, including the Property, and approached the school about the possibility of one of them being used for staff accommodation. It was ultimately agreed that the Property would be placed at the disposal of PSHA (which was formed at this stage) for the use of teachers. A management agreement was evidently entered into in 1976. Neither party has managed to find a copy, but a draft exists.

In 1992 the parties entered into a new management agreement dated 11 March 1992. It is this agreement with which I am primarily concerned, and I shall return to it shortly.

There were, I gather, proposals to replace the 1992 agreement in subsequent years. The papers include a draft dating from 2003. In the event, however, no further agreement was concluded, so the 1992 agreement remained in force.

Pimlico School ceased to exist as such in 2008, but it was succeeded by Pimlico Academy.

On 3 June 2009, solicitors acting for Family Mosaic gave notice to terminate the 1992 agreement. The letter included this:

“Client has decided that in future it will manage the property 63-67 St Georges Drive. This letter serves as notice terminating the agreement by which you have acted as managing agents of the property. This notice is to take effect on the day three months and three days after posting by first class mail of this notice to your registered office address.”

If this letter was effective to terminate the 1992 agreement, it should have come to an end on 6 September 2009. PSHA, however, disputes that Family Mosaic was entitled to terminate the agreement.

Family Mosaic claims to have been entitled to terminate under clause 2(7) of the 1992 agreement. Given its importance, I should set that clause out in full. It reads:

“This Agreement may be terminated as follows:

a.

By one party if the other party should be formally dissolved or cease operations.

b.

In the event of gross breach of this Agreement, entailing risk to the health or safety of the residents or the financial viability of the project, the Association reserves the right to take over immediate day to day control of the Property.

c.

Upon three months’ written notice by either party and with the mutual consent of both parties.

d.

By signing an amended Agreement.

Upon termination there shall be full accounting between the parties and all charges due from one party to the other to the date of termination shall be paid. Such accounting shall take place within 3 calendar months from the date of termination.”

Sub-clause (c) is the key one. Family Mosaic contends that it provides for alternatives: the agreement can be terminated either “upon three months’ notice” or “with the mutual consent of both parties”. Pimlico, on the other hand, maintains that the conditions are cumulative: in other words, that termination is possible under clause 2(7)(c) only if both (i) three months’ notice is given and (ii) there is mutual consent.

Guidance as to the law relating to the interpretation of contracts can be found in, for example, Pink Floyd Music Limited v EMI Records Limited [2010] EWCA Civ 1429; [2011] 1 WLR 770 and the recent decision of the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900. In the former case, Lord Neuberger MR said this in paragraph 17:

“The ultimate aim of interpreting such a provision…”

Ie, a provision in a commercial contract:

“… is to determine what the parties to the contract meant by it. And that involves ascertaining what a reasonable person would have understood the parties to the contract to have meant.”

Lord Neuberger went on as follows, in paragraph 18:

“… while one may proceed on the prima facie assumption that the words at issue mean what they naturally say, they cannot be interpreted in a vacuum. The words must be interpreted by reference to what a reasonable person (who is informed with business common sense, the knowledge of the parties, including of course of the other provisions of the contract, and the experience and expertise enjoyed by the parties, at the time of the contract) would have understood by the provision. So construed, the words of a provision may have a meaning which is not that which they may appear to have if read out of context, or the meaning which they may appear to have had at first sight. Indeed, it is clear that there will be circumstances where the words in question are attributed a meaning which they simply cannot have as a matter of ordinary linguistic analysis, because the notional reasonable person would be satisfied that something had gone wrong in the drafting.”

In the Rainy Sky case, Lord Clarke noted that “Where the parties have used unambiguous language, the court must apply it” (see paragraph 23) but he also said (in paragraph 21) that:

“If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

In Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38; [2009] 1 AC 1101, the House of Lords reaffirmed the principle that evidence as to what was done when a contract was being negotiated, is not admissible for the purpose of drawing inferences as to what the contract means. It is still more well-established that evidence as to what the parties subjectively intended is inadmissible. I do not think, therefore, that I can take into account what I was told by one of PSHA’s representatives, Mr Stephen Barlow, about the negotiations leading up to the 1992 agreement and what PSHA’s subjective intentions were.

Each side sought support for its interpretation of the termination provision in the terms and structure of the 1992 agreement. Mr Daniel Gatty, who appeared for Family Mosaic, argued that PSHA’s construction of sub-clause (c) would render the reference to “three months’ notice” superfluous. The parties could mutually consent to the agreement being terminated without three months’ notice, and neither party could insist on the agreement continuing even if given three months’ notice. It was also Mr Gatty’s case that, as a matter of language, sub-clause (c) is perfectly capable of referring to alternative means of termination.

PSHA, on the other hand, stressed the overall structure of the termination clause. Miss Sheila Thompson, PSHA’s principal spokesman, pointed out that the clause is divided into four sub-clauses and argued that sub-clause (c) must have been intended to provide for a single composite ground for termination. Had it been intended that the agreement could be terminated either on three months’ notice or with mutual consent, then, so it was submitted, the former would have been found in one sub-clause and the latter in another.

To my mind, both parties’ constructions are, in principle, possible ones. Which, therefore, makes better sense?

Mr Gatty argued that PSHA’s interpretation of sub-clause (c) makes no sense. He pointed out that it would mean that Family Mosaic had no right to terminate the 1992 agreement without PSHA’s consent, unless either PSHA was dissolved or otherwise ceased operations, or there was a gross breach of the agreement “entailing risk to the health or safety of the residents or the financial viability of the project”. Family Mosaic would not be able to bring the agreement to an end, even for gross breach, unless there was the specified risk to health, safety or financial viability. Family Mosaic might not, therefore, have any right to terminate, even if there were, say, persistent delays in passing over rents pursuant to clause 3(5), or the parties found themselves unable to agree budgets in accordance with clause 5(2). PSHA would also, Mr Gatty said, have no exit route. Such results, it was submitted, cannot have been intended.

Mr Gatty summarised his position as follows in his skeleton argument:

“In short, if cl. 2(7) has the meaning contended for by [PSHA], the parties are locked together forever, however unsatisfactory that may be for either party, except by mutual consent or in the event of a gross breach by [PSHA] endangering health and safety or the financial viability of ‘the project’. It would not even be open to [PSHA] to terminate the Agreement without [Family Mosaic’s] consent if [PSHA] no longer felt able to perform its obligations. That is not what a reasonable person would have understood the parties to intend by clause 2(7) of the Agreement.”

PSHA countered that its arrangements with Family Mosaic were intended to be long-term ones. That being so, it is, so it was said, understandable that there should be stringent restrictions on the termination of the 1992 agreement. PSHA came into being to facilitate the provision of staff accommodation and exists only for that purpose. It makes sense, it was argued, that its role should not be capable of being brought to an end for reasons of convenience. It is further suggested that in 1992 PSHA will have given up rights it enjoyed under the previous agreement in return for restrictions being imposed on termination.

This last point runs the risk of straying into evidence of pre-contractual negotiations and subjective intentions. In any case, it is not apparent from the evidence before me that the 1992 agreement involved PSHA having up a position as landlord, as was suggested. The draft agreement from the 1970s provided for PSHA to “make clear to the tenants that [Family Mosaic] is the landlord”, and the document in which there is a reference to the “landlord” being “in the first instance the P.S.H.A. Management Committee” looks to be an explanatory one rather than an actual tenancy agreement. Further, it seems probable that Family Mosaic could have terminated whatever rights PSHA had under the 1970s agreement on notice. The draft agreement certainly contained a notice provision.

At the end of the day, I have concluded that Family Mosaic’s construction is much the more consistent with common sense. Having heard Miss Thompson’s sensible and measured representations, I can well understand why PSHA has been reluctant to accept that the 1992 agreement has been terminated and also why many of the tenants at the Property have expressed the wish for the 1992 agreement to continue. Viewing matters objectively, however, it seems to me that the parties are most unlikely to have wished to lock themselves into a relationship in the way that PSHA’s construction would imply. A reasonable person, informed with business common sense, would, I think, have understood that the parties intended to be able to terminate their agreement, either with mutual consent or on three months’ notice. It follows that the 1992 agreement will have been validly determined by the letter of 3 June 2009 with effect from 6 September 2009.

Having arrived at that conclusion, I do not strictly need to deal with Mr Gatty’s alternative way of putting his case, but I shall refer to it briefly. Mr Gatty argued that the 1992 agreement created a relationship of agency which Family Mosaic could terminate at will, regardless of whether that gave rise to a breach of contract. In support of this submission, Mr Gatty took me to Bowstead & Reynolds on Agency (19^th Ed) where it is stated in paragraph 10.024:

“The general rule, which is perhaps not widely understood, is that the authority of an agent, whether given by power of attorney, or informally, even if for consideration, and whether or not expressed to be irrevocable, is revocable, without prejudice to the fact that such revocation may be wrongful as between principal and agent. The revocation may be oral whether or not the authority was conferred in writing. There is a power to revoke: but there is not necessarily a privilege to exercise the power -- there may indeed be a duty not to do so, with the result that the revocation is a breach of contract. This is subject to the rules as to irrevocable authority set out in Article 118.

The rule is based on policy, and is the same as that relating to dismissal of persons working under contracts of service: “the proper conduct of the affairs of life necessitates that this should be so”. It is reinforced by the separate rule that a contract of agency will not usually be enforced by a decree of specific performance. Frequently, of course, the revocation or renunciation constitutes the acceptance of a repudiatory breach by the other party.”

Mr Gatty also referred to Temple Legal Protection Limited v QBE Insurance (Europe) Limited [2009] EWCA Civ 453; [2009] 1 CLC 553; to Frith v Frith [1906] AC 254; and to Venning v Bray (1862) 2 B&S 502.

This argument seems to me to have considerable force, but I do not need to arrive at any final conclusion on it. For the reasons I have outlined earlier, I take the view that Family Mosaic was entitled to terminate the 1992 agreement on three months’ notice pursuant to clause 2.7(c).

In the circumstances, I shall declare that the 1992 agreement was determined with effect from 6 September 2009. There will also, consequentially, be an order for an account to be taken.