Royal Courts of Justice
Strand, London, WC2A 2LL
Date of Draft Judgment: 22nd February 2010
Before :
THE HON MR JUSTICE COULSON
Between :
GOLD GROUP PROPERTIES LIMITED | Claimant |
- and - | |
BDW TRADING LIMITED (formerly known as BARRATT HOMES LIMITED) | Defendant |
Mr Jonathan Acton Davis QC (instructed by Field Seymour Parkes) for the Claimant
Mr Nicholas Dennys QC (instructed by Osborne Clarke) for the Defendant
Hearing Date: 5th February 2010
Judgment
The Hon Mr Justice Coulson:
INTRODUCTION AND ISSUES
By an application made on 17.12.09, the Claimant (whom I shall call hereafter “Gold”) seeks summary judgment, with damages to be assessed, against the Defendant (whom I shall call hereafter “Barratt”). The dispute between the parties arises out of a Development Agreement (“the Agreement”) dated 10th August 2007, relating to a substantial site at Gadoline House, Godstone Road, Whyteleafe, in Surrey. The intention was that Barratt would develop the site by building a large number of houses and flats, which would then be sold on long leases, with Gold (as the freeholder owner) and Barratt sharing the revenue generated by the sales. In the event, next to nothing happened on site between 2008 and 2009. The reasons for that inactivity lie at the heart of Gold’s claim for summary judgment.
It is Barratt’s case that it was a condition precedent to their commencement and carrying out of building works on site that the properties would fetch the minimum prices set out in one of the schedules to the Agreement. They argue that, because they had received advice that a fall in the property market meant that those minimum prices would not be achieved, they were not obliged to start work and/or the Agreement was frustrated. There is also an argument that, in these circumstances, Gold were in breach of contract for failing to re-negotiate the financial elements of the Agreement.
Gold, on the other hand, say that the minimum prices were inserted into the Agreement as a form of protection for Gold only, to guarantee them a minimum recovery from the development, and that there was nothing to justify Barratt’s wholesale refusal to carry out the building works on site. Whilst they accept that the assessment of the damages flowing from what they maintain was Barratt’s wrongful repudiation of the contract will give rise to issues which would require a separate quantum hearing, Gold say that Barratt have no realistic prospect of defending the claim on liability. Thus, Gold submit, summary judgment should be entered in their favour pursuant to CPR Part 24.
I consider that the following issues arise for my determination on this application:
Construction Issues (Section 5 below)
For whose benefit was the Fourth Schedule of the Development Agreement (i.e. the Schedule that set out the minimum prices?
Was the ability to realise those minimum prices a condition precedent to Barratt undertaking the development works?
Frustration (Section 6 below)
Was the Agreement frustrated as at 12th January 2009?
Breaches of Contract (Section 7 below)
Were Barratt in breach of contract as at 12th January 2009?
Were Gold in breach of contract as at 12th January 2009?
Repudiation (Section 8 below)
Did Barratt wrongfully repudiate the contract in 2009 and, if so, was that repudiation accepted by Gold?
Did Gold wrongfully repudiate the contract in 2009 and, if so, was that repudiation accepted by Barratt?
Before addressing those issues, I set out in Section 2 below the limits of the court’s enquiry on this application, before going on to identify in Section 3 the relevant terms of the Agreement and, in Section 4, the relevant facts. I am very grateful to leading counsel for their considerable assistance in dealing with the disputes between the parties.
THE LIMITS ON THE COURT’S ENQUIRY
Because this is an application pursuant to CPR 24, I am keenly aware of the limits upon the Court’s enquiry into the issues. Ultimately, the only matter of relevance is whether Barratt has a real prospect of successfully defending the claim for wrongful repudiation and/or breach of contract. That is not a particularly high hurdle for a defendant to overcome. The authorities make it plain that, in order to satisfy this test, a defendant has to demonstrate a defence which is not ‘false, fanciful or imaginary’, and is better than merely arguable: see International Finance Corp v Utexafrica Sprl [2001] CLC 1361 and E D & F Mann Liquid Products v Patel [2003] EWCA Div 472.
Generally under CPR Part 24, the Court should endeavour to avoid, wherever possible, any sort of mini-trial on an application for summary judgment: see Swain v Hillman [2001] 1 All ER 91. At any subsequent trial, what matters is ‘whose case is the more probable’ whilst, under Part 24, ‘the criterion which the Judge has to apply under CPR Part 24 is not one of probability; it is absence of reality’: see Lord Hobhouse of Woodborough in Three Rivers DC v Bank of England (No.3) [2001] 2 All ER 513.
However, there can be no doubt that in the present case, the Court can and should look closely at the issues raised and the evidence relied on. There are four particular reasons for that. First, many of the issues are matters of construction of the Agreement. A judge dealing with a pure question of contract construction on a Part 24 application is in just as good a position to reach a conclusion on that question as the judge in any subsequent trial. Secondly, one of the principal issues in this case concerns the alleged frustration of the Agreement, and the authorities are clear that that is also a matter of law not fact (see Section 6.1 below).
Thirdly, in the present case, the dealings between the parties over the relevant period are summarised in a handful of documents and there is very little to suggest that these documents are not a complete record of the deterioration of the relationship between the parties at the relevant time. Finally, as we shall see, many of the background facts, including a number of the allegations of breach, are not – cannot be - disputed by Barratt.
There was nothing in the witness statement produced by Mr Champion on behalf of Barratt which suggested that there was any additional evidence on the issues raised by the application which, for whatever reason, had not been placed before the Court. When I raised that matter expressly with Mr Dennys, he raised three possible areas for further research: the background to the Agreement; the absence of the files belonging to a Barratt subsidiary, namely Barratt Thames Valley; and the failure on the part of Barratt to obtain any evidence from Mr Tuthill, the director originally responsible for this project who no longer works for Barratt. I deal with each of those alleged restrictions in the appropriate place below.
Accordingly, whilst I have very much in mind the principles noted in paragraphs 5 and 6 above, I have concluded that it is appropriate, in the particular circumstances of this case, to enquire rather more fully than is normal under CPR Part 24 into the issues that have arisen between the parties.
THE DEVELOPMENT AGREEMENT
Background
Of course, it is trite law that no contract can be construed in a vacuum, and that it is always necessary for the Court to have regard to the background to the contract when construing its express terms: see Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896. In the present case, neither side has suggested that there is any particular aspect of the background to the Agreement to which the Court should have regard. Although it was suggested by Mr Dennys that there may be relevant background material about which Barratt are presently unaware, that seems highly unlikely, particularly as their own witness, Mr Champion, has considered the issue and expressed no such caveat in his statement. Indeed, he refrained from referring to the negotiations at all because he said that he had been advised that “they are unlikely to be admissible to influence the meaning of the Development Agreement”.
The one part of the background that both sides referred to is the letter from Barratt to Gold of 7th February 2007, which was in the following terms:
“Dear Mr Gold
Gadoline House, Godstone Road, Whyteleafe
Further to our meeting yesterday afternoon, I would like to confirm this Company’s interest in the purchase of the above site and would further confirm that while I am happy to increase my offer of £7,700,000 to £8,000,000 (eight million pounds), subject to contract, this offer would be subject to vacant possession being available on completion.
I understand this might cause a tax problem, given that you have Ann Summers in occupation and likely to stay in occupation until alternative premises can be found/built.
As discussed I am happy to make the following proposal.
The Gold Property Group retains the freehold of the property and enters into a development agreement with Barratt Homes. Instead of a straightforward land purchase when one would normally exchange on such a purchase, Barratt Homes would enter into an Option to enter into the development agreement, the only condition being vacant possession.
On vacant possession, Barratt would complete the development agreement and would, under licence, construct on behalf of the Gold Property Group the properties with the benefit of the detailed planning permission.
In return for constructing the properties, the Gold Group of Companies would pay Barratt Homes:
45% of the first £18,000,000 of revenue and 5% of the first £18,000,000 as an agency fee for selling the properties
A further 55% of the next £1,500,000 of revenue for constructing the properties and 5% for sales and marketing
For revenues of £19,500,000 to £26,000,000 Barratt would be paid 95% of the revenue for constructing the properties and 5% for selling the properties
For any revenue beyond £26,000,000 Barratt would be paid 55% of the revenue for constructing the properties and 5% for selling the properties
In summary, the above proposal would enable the Gold Property Group to retain £9,000,000 from the first £18,000,000 of revenue, £600,000 from the next £1,500,000 of revenue and a 40% share of any revenue in excess of £26,000,000; therefore on current estimates the share to the Gold Property Group would total £9,600,000. Our current estimate of revenue from both the private residential, the affordable residential and the doctor’s surgery is £25,600,000. In addition, the Gold Group would retain the freehold of the buildings and our estimation of the value of the ground rents for the private residential at £200 per annum for a one-bedroom flat and £300 per annum for two-bedroom flats, would be at 17 times (the current multiple that we are achieving for a standard Barratt lease) and would produce a further £457,000. The overall amount from this development, assuming sales only reach £19,500,000, would be £10,057,000.
The sums that we are working on assume that the social housing and the doctor’s surgery will produce a combined income in excess of £2,500,000, giving private revenue of £23,000,000 or thereabouts. Therefore, not to achieve a total revenue of £19,500,000, the private housing revenue would have to drop from an estimated £23,000,000 to £17,000,000 (28%), a dip even the most pessimistic commentators would have trouble justifying.
As discussed at our meeting, the concept behind the above is that there is a perceived risk to the freeholder. However, as you can see from above we have tried to minimise the risk and of course you are at no risk to building cost overruns as the potential share is based entirely on revenue and not profit.
I trust that the above is of interest and look forward to hearing from you in due course.”
Accordingly, I find that the following constituted the background to the Agreement:
Gold owned a large site in Surrey which they originally wanted to sell to a property developer.
Barratt were interested in buying the site. One option was a straight sale for a fixed price.
The letter of 7th February 2007 from Barratt to Gold made plain that a straight sale may not be possible.
The letter proposed an alternative arrangement which would see Barratt completing the development and selling the properties on behalf of Gold, who would retain the freehold, with an agreed split of the sales revenue thereby generated.
That option, which was first raised in the letter of 7th February, was the option which the parties thereafter pursued, and it formed the basis of the Development Agreement.
The Agreement Itself
Clause 3 of the Agreement provided:
“3. APPOINTMENT
The Freeholder [Gold] appoints Barratt:
3.1 to procure the design and build of the Development in accordance with this Agreement; and
3.2 as the agent to market the Property in accordance with this Agreement.”
Barratt’s obligations were set out in Clause 5. The relevant parts of that clause read as follows:
The principal services to be carried out by and at the cost of Barratt to be more particularly described in the remainder of this Agreement are:
The co-ordination superintendence and supervision of the carrying out of the Development;
Advising on promotional and marketing campaigns for the Disposal of Units at the Property and exchanging Agreements for Sale for the Disposal of Units at the Property as agent of the Freeholder each Agreement for Sale being at no less than the Minimum Price for that Unit; and ………
The maintenance and management of the Property to include the establishment and operation of any Management Company (including the payment of all outgoings until the Disposal of all the Units has occurred).
……….
To do all such acts and matters and things as may be consistent with necessary for or incidental to the attainment of the foregoing services and to maximise the value of the Development.
Barratt shall procure that the Development is begun and completed in accordance with the Development Plan, Requisite Consents and the requirements of all lawful authorities within 30 months from commencement of the Development…..
In carrying out its obligations Barratt shall:-
comply with the Development Obligations in the Development Plan;
keep the Freeholder informed of the progress of the Development;
comply with the Marketing Plan;
keep the Freeholder informed of the progress of the marketing of the Units; and
in any case have due regard to the proper and reasonable requirements and representations of the Freeholder……..
The “Minimum Sale Price” was defined as “the minimum Net Revenue of each Unit in accordance with the Minimum Price Schedule”. The Minimum Price Schedule was itself defined as “the schedule of minimum prices as set out in the Fourth Schedule or any schedules substituted therefor from time to time by agreement of the parties”. The Schedule consisted of two pages of figures in which a minimum price was ascribed to every property to be built. The stated total was £23,972,845, which included the private housing, the social housing and the proposed medical centre (referred to as the PCFU).
There were references in clause 5 of the Agreement to the Second Schedule. This contained a more detailed list of what were called Barratt’s Development Obligations. At paragraph 2, the schedule made Barratt responsible for the appointment of the Building Contractor. At paragraph 4, it required Barratt not to vary alter add or remove anything from the approved specification without Gold’s consent, such consent not to be unreasonably withheld. Paragraph 7 of the Second Schedule was in the following terms:
“7. THE BUILDING WORKS
7.1 Barratt will commence and proceed diligently with the Building Works as soon as is reasonably practicable and in any event within 12 weeks from the grant of vacant possession.
7.2 Barratt will complete the Building Works as soon as reasonably practicable but in any event within 30 months after the commencement date set out in paragraph 7.1 of this Schedule.
7.3 Barratt will procure that the Building Works are carried out at its own cost:
7.3.1 In a good and workmanlike manner and in accordance with good building practice;
7.3.2 With good and suitable materials;
………
7.3.7 With due diligence…”
Clause 6 of the Development Agreement was entitled ‘INFORMATION AND DEVELOPMENT PLAN’. The relevant paragraphs of that provision were clauses 6.1 and 6.4 as follows:
“6.1 Following the approval of the detailed specification for the Development in accordance with the provisions of paragraph 4 of the Second Schedule Barratt will update the Development Plan to include a detailed programme of works and cash flow and projected dates for the issue of the certificates of sectional completion of the PCFU and will provide a copy to the Freeholder for their approval (such approval not to be unreasonably withheld provided the revised Development Plan is consistent with the Development Plan attached to this Agreement.
…………
6.4 Following the approval of the detailed specification for the Development in accordance with the provisions of paragraph 4 of the Second Schedule Barratt will produce a Marketing Plan for the Units to include a detailed programme of sales strategy for each phase or block within the Development the range of sale prices and the proposed Financial Incentives the timing of the sales campaign and will provide a copy to the Freeholder for their approval (such approval not to be unreasonably withheld).”
The Development Plan was attached to the Agreement as the Third Schedule. It was defined in the Agreement as “the estimate of cash flow expenditure and the programme of works which are set out in the Third Schedule as varied from time to time by Barratt and approved by the Freeholder…” The Development Plan comprising the Third Schedule was a relatively simple programme bar chart with projected cash flow also shown. It showed each step in the process from vacant possession down to completion of sales. The projected construction period shown on this original Development Plan was 23 months after commencement.
The reference to the Marketing Plan in clause 6.4 was the subject of a definition in these terms: “a detailed plan setting out the sales strategy for each phase or block within the Development the range of sale prices the proposed Financial Incentives the timing of the sales campaign…to be prepared and updated in accordance with the provisions of this Agreement”.
Clause 7 was in the following terms:
“7 GENERAL DUTIES AND RIGHTS OF THE FREEHOLDER
7.1 The Freeholder will where necessary and appropriate co-operate with Barratt to enable Barratt to discharge its duties, and the Freeholder will respond promptly to requests properly made by Barratt for approvals, instructions, information or assistance.
7.2 The Freeholder hereby appoint Barratt as its agent to:
7.2.1 Sign and exchange Agreements for Sale SUBJECT TO the Net Revenue of each Unit being no less than the Minimum Price for such Unit……………..
7.3 For the avoidance of doubt Barratt may commit the Freeholder to provide Financial Incentives in respect of Units SUBJECT TO this not resulting in the Net Revenue for any unit being less than the Minimum Sale Price for such Unit…..
Clause 8.1 provided that “Barratt and the Freeholder will observe and perform their respective obligations and the conditions set out in the Second Schedule and will at all times act in good faith”.
Clause 10 dealt with the financial apportionment between the parties. It was in the following terms:
“10 FINANCIAL PROVISIONS
10.1 In consideration of the services provided to the Freeholder by Barratt pursuant to this Agreement the Freeholder shall pay to Barratt on each Completion Date
10.1.1 45% of the Net Revenue of each Unit and the PCFU received by the Freeholder for its services as contractor under clause 3.1 of this Agreement plus a further 5% of the Net Revenue of each Unit and the PCFU received by the Freeholder for its services as agent under clause 3.2 of this Agreement until such time as the aggregate payment of the Net Revenue of each Unit and PCFU equals £18,000,000
10.1.2 55% of the Net Revenue of each Unit and the PCFU received by the Freeholder for its services as contractor under clause 3.1 of this Agreement plus a further 5% of the Net Revenue of each Unit and the PCFU received by the Freeholder for its services as agent under clause 3.2 of this Agreement while aggregate payment of the Net Revenue and the PCFU equals a sum between £18,000,000 and £19,500,000
10.1.3 95% of the Net Revenue of each Unit and the PCFU received by the Freeholder for its services as contractor under clause 3.1 of this Agreement plus a further 5% of the Net Revenue of each Unit and the PCFU received by the Freeholder for its services as agent under clause 3.2 of this Agreement while aggregate payment of the Net Revenue of each Unit and the PCFU equals a sum between £19,500,000 and £26,000,000……..”
In other words, if the net revenue generated by the sales of the properties was £18 million (or less), Barratt would receive 50% of the total; if the revenue increased to £19.5 million, Barratt’s share of the total went up to 60% and, if the total revenue went beyond £19.5 million, then Barratt essentially retained the entirety of the revenue generated between £19.5 and £26 million. Clause 10.1.4 provided for a 60/40 split in Barratt’s favour if the total revenues exceeded £26 million.
Clause 11 was entitled ‘Good Faith’ and provided that each party would at all times act in good faith towards the other and use all reasonable endeavours to ensure the observance by themselves of the Agreement. Clause 12 made plain that the Agreement was not a partnership. Clause 18 was in these terms:
“18 SEVERABILITY
If any of the provisions of this Agreement is found by the Expert or court or other competent authority to be void or unenforceable, it should be deemed to be deleted from this Agreement and the remaining provisions shall continue to apply. The parties shall negotiate in good faith in order to agree the terms of a mutually satisfactory provision to be substituted for the provision found to be void or unenforceable.”
Clause 23 provided a dispute recognition mechanism which required, in the first instance, for any dispute between the parties to be referred to an Expert (referred to in clause 18, above). The clause provided a tight timetable of 45 days in total for the resolution of any such disputes.
Finally, Clause 24 contained termination provisions exercisable by Gold if Barratt were “in material breach of its obligations under this agreement”. The clause provided that, in such circumstances:
“…the Freeholder may, by notice in writing served on Barratt, serve notice of its intention to terminate this Agreement and in the event that Barratt does not remedy the breach complained of within 20 Working Days following service of such notice this Agreement shall terminate absolutely, the licence granted pursuant to clause 7.4 shall determine and Barratt shall vacate the Property. Any determination of this Agreement by the Freeholder shall be without prejudice to any right or claim that either party may have in relation to any antecedent breach by Barratt of its obligations under this Agreement.”
THE RELEVANT FACTS
There is no dispute that vacant possession was granted to Barratt on 1st March 2008. Accordingly, pursuant to paragraph 7.1 of the Second Schedule, Barratt were obliged to commence the Building Works no later than 1st June 2008 and to proceed thereafter with diligence. The 23 month period shown in the Third Schedule expired in about January 2010. The 30 month completion date referred to in clause 5.2 and paragraph 7.2 of the Second Schedule would have been in early January 2011.
None of this happened. Paragraph 13 of Mr Gold’s statement is not contested by Barratt. He said there:
“The defendant did not attend site with workers until about the summer of 2008. Attendance on site at this time was only to undertake pre-construction work such as soil testing and site surveys. In particular, this work was not sufficient to be deemed an effective start for planning purposes. This work was well over 12 weeks from the grant of vacant possession.”
Paragraph 15 of Mr Gold’s statement, again not disputed, was in these terms:
“At some point during the summer to November 2008, the Gadoline House warehouse and office building was burnt down by vandals. Barratt demolished the remains of the building but left the other warehouse (the unit 4 warehouse) standing. There was progress on some of the other pre-start preparatory work. For example, there were discussions between Barratt and EDF regarding the relocation of the electricity sub-station and with Thames Water regarding the diversion of the culvert running across the site, but no attempt appears to have been made to start actual construction work.”
The final position on site was summarised by Mr Gold at paragraph 19 of his statement, which was also undisputed by Mr Champion. He said:
“Having first attended site in about the summer of 2008, the defendant carried out very little work. It has done only minor demolition work to an unsafe structure (as set out at paragraph 15 above) and out of necessity rather than as a prelude to construction. No work has been done since then and on 13th March 2009 the defendant returned the keys to the site by delivery through the hoarding on the site (itself a breach of clause 7.5.1 of the Second Schedule). There has been no attempt to proceed diligently with the Building Works, or to complete them within a reasonably practicable time. There is no possibility of their being completed within 30 months of 1 March 2008.”
It is plain that, at about the time the building works should have been starting in the Spring of 2008, the recession was beginning to bite. Barratt were particularly badly affected. The evidence shows that, in May 2008, the Barratt Group reported a 33% decline in the amount of sales agreed each week compared with the previous year. In June 2008, the Group’s value fell from £488 million to £213 million in a week. This was accompanied by advice from some City brokers not to buy shares in the Group at any price. Mr Champion admits at paragraph 6 of his statement that, at this time Barratt “was in negotiations with its bankers to reschedule its borrowings.”
The director responsible for this development was Mr Martin Tuthill. There is no statement from him and, as noted above, he no longer works for Barratt. There is no record of Mr Tuthill, or anyone else at Barratt, providing any formal notification to Gold during the summer or early autumn of 2008 that there were any problems or difficulties with the proposed development of this site. Barratt did not say during this period that there might be a problem with the minimum prices of the properties. It seems to me that this was, on any view, a significant omission. The only inference that I can draw from Barratt’s complete lack of progress during this period is that it was the result of their own financial difficulties.
On 4th November 2008, there was a meeting between the parties. It appears that Mr Bradley Gold and Mr Lee-Uff, Barratt’s Land Director, attended the meeting, although it is unclear who else was there. There are no minutes. What is clear is that, at that meeting, Barratt provided a copy of a Marketing Report which they had prepared, dated 31.10.08. That report noted that “agents within the Whyteleafe area have indicated that property prices in the area have been affected by at least 20% in the last six months alone with the majority of reductions being seen to have a major impact on flatted and apartment schemes.” The report proposed that:
“One bedroomed apartments should start from £157,500. In addition to this, two bedroom apartments on the development have been agreed to be marketed from £210,000 to achieve a total gross development value for the private units of £19,320,000.”
The report concluded:
“Due to this reduction [on values in the area] Barratt have priced the one bedroomed apartments in the scheme below the suggested prices by agents within the area and have placed the two bedroomed apartments at an affordable level in line with the agents suggestions in the area.”
The principal option proposed by Barratt in consequence was recorded in their subsequent letter to Gold of 19th November 2008. The relevant part reads as follows:
“With regards to the market, of which our recent marketing report was tabled, it is clear that at present the sales values are considerably below that of the contracted minimum values. This would result in a loss making project in the event that the proposal was to be progressed at present and it was suggested that the build be delayed until at least December 2010 unless mutually agreed to commence earlier as a result of the market improving.”
It appears that at the meeting on 4th November Mr Gold did not accept this proposal, that the works on site should simply be delayed. Instead he made a suggestion about phasing the building works to be carried out. However, Barratt rejected this proposal, setting it out in some detail in their letter of 19th November, but then going on to say:
“Unfortunately the expenditure in cash considerably outweighs the income to Barratt Thames Valley and therefore we are unable to bring forward this first phase of the scheme.”
The letter went on to identify what seemed to be a new proposal by Barratt:
“The alternative which Barratt would be happy to explore would be to bring the build forward now by reviewing the current payment terms on the following basis
Gold Group to receive 30% of the £15 million of revenue (£4,500,000)
Gold Group to receive 40% of the next £5 million of revenue (£2,000,000)
Gold Group to receive 10% of the next £2.3 million of revenue (£230,000)
Gold Group to receive 90% of the next £3.2 million of revenue (£2,880,000)
Any revenue over and above £25.5 million to be split 50/50.
The above split would provide the Gold Group with its original land value of £9.6 million if the gross development value returns to the original expected revenue of £25.5 million prior to the units being marketed in the later part of 2009 and early 2010.
I trust that the revised payment term proposal would be acceptable in order to bring the development forward and to avoid the project being delayed as we have already discussed.
I look forward to hearing from you in order for us to clarify the way forward that has resulted from these unfortunate economic issues we are encountering.”
The Gold reply was dated 17th December 2008. It expressed sympathy with Barratt’s position but pointed out that Gold were also suffering from the same market conditions because, amongst other things, “we are already incurring significant holding costs and will inevitably experience a considerable delay in accessing the sales revenue.” The letter went on to set out Gold’s position in respect of the minimum sale prices in the Agreement. It said:
“You appear to be making the case that as the projected sales values fall below the contract minimum vales then this gives you a valid and contractual reason not to build out. This is not the case as the benefit of the contract with regard to the minimum sales figures is solely for ourselves.”
The letter rejected the proposed rearrangement of the payment terms, concluding that these suggestions were not “appropriate”. The letter went on to criticise Barratt’s failure to start within 12 weeks of the granting of vacant possession and the failure to proceed diligently with the works. The letter observed that Barratt “appear to have little intention to complete within the stated 30 months” and concluded:
“In summary we wish to formally record that you are in breach of your contractual obligations and that this situation is causing, and will continue to cause us substantial losses. We hereby give you notice that we insist that this breach is remedied by 12th January 2009. To this end, as an absolute minimum, we would expect by this date:
1. Receipt of confirmation by yourselves that going forward you intend to fully commit to this project and honour your contractual obligations.
The demolition contractor to commence work.
Preparation of a fully detailed construction programme, to be submitted to us for our approval, which demonstrates an intention to recover as much of the lost time as is possible.
Please be assured that we are most disappointed to feel it necessary to write this letter and it is still our wish to proceed on an amicable and co-operative footing. However, should you decide not to positively address this situation then we shall no alternative but to consider taking this matter further.”
Barratt did not do any of the things that Gold asked. Instead, on 12th January 2009 (which, as Mr Acton Davis points out, was the final date of the deadline imposed by Gold in the letter of 17th December) their solicitors wrote to Gold, making the case that the contract was void and unenforceable. The relevant parts of the letter were as follows:
“We have advised Barratt that the Agreement is at an end and is therefore unenforceable. There are two alternative legal bases on which the Agreement has been brought to an end, both relating to the provisions of the Agreement as regards the Minimum Price for the leasehold units that were to be sold.
Firstly, it is very clear from the Agreement that the parties were proceeding on the common assumption that the future market value of the units would not be less than the minimum prices in Schedule 4. This common assumption as to future value made at the time the Agreement was entered into was mistaken and it is that mistaken assumption that has given rise to a mutual mistake between the parties. The legal effect of this mutual mistake is to render the Agreement void and unenforceable.
The alternative basis, which is equally compelling, is that the Agreement has been discharged by frustration. Frustration has arisen here because a supervening event, being a fall in property market values, has occurred which now renders performance of this fundamental part of the Agreement impossible as the parties are unable to sell the units at the minimum prices now or in the foreseeable future. This fall in the property market was not the fault of either party and the risk of such a fall is not catered for in the drafting of the Agreement. Consequently, as it is impossible for this contractual obligation to be performed, the Agreement has been frustrated and the parties’ obligations under it discharged.
The result of either of the scenarios set out above is the same – the agreement is at an end (either as it is void or it has been discharged) and it is therefore unenforceable against our client…….”
Notwithstanding those paragraphs, Barratt’s solicitors went on to say that Barratt had a continuing desire to build the development “but as the Agreement currently stands this is impossible”. They referred back to the letter of 19th November and said that the proposals in that letter “remain on the table for discussion if you are open to proceeding with this project on new payment terms. However, the only way forward is a new payment structure to reflect current market conditions and current values for the units to be constructed, and so if you are not willing to discuss a revised payment structure our client will have no option but to treat the Agreement as at an end on the grounds set out above.” The final paragraph of the letter, under the heading ‘Way Forward’ repeated the need for new payment terms and repeated the offer that Barratt was “therefore ready to sit down to discuss this with you at the earliest opportunity so we await your response. If you do not respond positively to this offer to discuss revised proposals then our client’s position is clear” (Footnote: 1).
Surprisingly, there was no response to this letter. As noted above, it appears that, at some point thereafter, Barratt put the keys to the site through the letterbox in the hoarding. On 13th March 2009, Barratt’s solicitors wrote again claiming £395,665.36 plus VAT by reference to work allegedly done at the site. The letter claimed that Barratt were “entitled to damages from you equivalent to the value of the benefit you have received/the enhancement in the value of your interest in the property arising out of our client’s steps under the Agreement whilst it was extant.”
This letter finally prompted a response from Gold. The response was dated 26th March 2009. In it, Gold said:
“Gold does not agree that the Agreement is at an end and/or unenforceable by reason of any of the grounds cited in your letter of 12th January 2009. Gold holds the opinion of Leading Counsel who concurs with Gold’s views that the grounds on which Barratt seek to rely are wrong as a matter of construction and in law.
Leading Counsel has advised that Barratt stands in material breach of the Agreement and that Gold is entitled to pursue a number of remedies in consequence. Currently Gold is considering which of its remedies it will pursue including the possibility of seeking declaratory relief under a declaration in the High Court by way of summary judgment.
Way Forward
Before taking steps to enforce its right under the Agreement, Gold has decided to make one final attempt to resolve the matter amicably. You will be aware that a meeting has been arranged between Mr Bradley Gold of Gold and Mr Tuthill of Barratt which will take place on 31st March 2009.
In the event that the meeting does not identify a resolution to the matter then Gold intends to pursue its remedies under the Agreement to the fullest extent.
For the avoidance of any doubt whatsoever the claims made in your letter of 13th March 2009 are rejected in their entirety. The agenda for the meeting between Mr Gold and Mr Tuthill will be to identify a resolution under which either Barratt performs its obligations under the Agreement or alternatively tenders a financial offer acceptable to Gold to bring the Agreement to an end. Mr Tuthill should attend the meeting with this agenda in mind.”
There is no evidence before me about the meeting on 31st March 2009. Indeed, on the face of the documents, nothing else happened until 14th August, when Gold wrote a lengthy letter to Barratt which identified various breaches of the Development Agreement by Barratt. The letter went on:
“2.1 Without prejudice to Gold’s contention that Barratt’s letter of 12th January 2009 amounted to a repudiatory breach of the agreement which Gold was entitled to accept (and has accepted), Gold is prepared to allow Barratt an opportunity to remedy its breach of the Agreement identified in paragraph 1.7 above within 20 working days of the date of this letter.
2.2 Provided either the breaches are remedied within 20 working days or Barratt demonstrates itself willing to remedy and confirms it will honour and perform the other terms of the Agreement, then Gold is prepared to allow Barratt to complete the development within a reasonable period and for both Gold and Barratt to perform the other terms of the Agreement within an adjusted timescale.
2.3 In the event Barratt does not remedy the breaches within 20 working days of the date of this letter then that failure will have the consequences set out [at] clause 24 of the agreement. To the extent necessary, this letter is notice in writing under Clause 24 of the Agreement because Barratt is in material breach of its obligations under the Agreement as set out above.
2.4 In the event that the Agreement has already terminated or terminates as a consequence of Barratt’s failure to remedy pursuant to paragraph 2.1 and 2.2 above, then Gold intends to commence proceedings in the High Court against Barratt for breach of contract and to recover damages for its losses……”
The final letter in this sequence was from Barratt’s solicitors dated 2nd September, which reiterated the contents of the letter of 12th January 2009. It said “we remain of the view that the Agreement is at an end” for the reasons set out in the earlier letter.
These proceedings were commenced on 23rd November 2009, alleging breaches of the Agreement by Barratt, and their wrongful repudiation of that Agreement in 2009. The application under CPR Part 24 was made on 17th December 2009. The application is supported by a statement from Mr Bradley Gold, to which I have referred above. The statement in response, signed by Mr Jeremy Champion, to which I have also made reference, is relatively short. This is at least in part explained by the fact that Mr Champion had no involvement in any of the relevant events. His statement does, however, exhibit a draft defence and counterclaim, which sets out Barratt’s case as to frustration; Gold’s breaches of the Agreement; and Gold’s own wrongful repudiation of the Agreement. It should be noted that the argument as to mistake, being the first point taken in Barratt’s solicitors’ letter of 12th January 2009, is no longer pursued.
THE ISSUES OF CONSTRUCTION
The Importance of the Contract Terms
In any situation where one party to a contract alleges that the contract has been frustrated, the proper construction of the contract will be the necessary starting-point of the Court’s investigation. In Davis Contractors Limited v Fareham UDC [1956] AC 696, Lord Reid said:
“It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract, read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made.”
In reaching this conclusion, Lord Reid followed the approach of Viscount Simon in British Movietone News Limited v London and District Cinemas Limited [1952] AC 166 at page 185 where he said:
“If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point – not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.”
Accordingly, I deal first with the construction issues. They go a long way towards supplying an answer to the question of whether or not the Agreement was frustrated.
For Whose Benefit Was The Fourth Schedule (The Schedule Of Minimum Prices)?
It is Gold’s case that the Schedule of Minimum Prices was inserted into the Development Agreement for their sole benefit. As set out in the letter of 17th December 2008 (paragraphs 36 and 37 above), it is their case that these prices were designed simply to ensure that there was a minimum amount by way of revenue which they recovered in consequence of the Agreement. They did not apparently consider that the Schedule of Minimum Prices was of any benefit to Barratt.
On a proper construction of the Agreement, I am in no doubt that this contention is wrong. There is nothing in the Agreement which provides that the Schedule of Minimum Prices was solely for Gold’s benefit. On the contrary, the Fourth Schedule was designed to apportion benefit and risk equally between Gold and Barratt.
I accept the proposition that the Agreement was designed to ensure that, at least as a starting-point, Barratt sold the properties for nothing less than the minimum price, thereby indicating a minimum level of return for Gold. That would also benefit Barratt, who were going to recover a 50% share of the revenues up to £18 million. But it is equally clear that this minimum recovery was not set in stone or incapable of variation. The Agreement provided expressly that the Minimum Prices could, in appropriate circumstances, be changed by agreement between the parties: see the specific reference to “any schedule substituted therefor from time to time by agreement of the parties” in the definition set out at paragraph 16 above. In addition, the numerous other terms of the Agreement which provided for good faith, agreement between the parties, proposals by Barratt to be approved by Gold and so on, reflected the reality that this was a complex and detailed arrangement which required co-operation between the parties in order to work (Footnote: 2).
Take, by way of an example, a particular property which Barratt had built and which, for various reasons, Barratt wished to sell at less than the minimum price set out in the Fourth Schedule. Barratt would seek Gold’s consent to the sale at the lower price pursuant to the express term that the minimum prices in the Fourth Schedule were subject to renegotiation and agreement between the parties. If Gold then refused to agree to a lower price then, depending on the reasons for the proposed reduction, they might be in breach of contract for failing to agree. More importantly, any dispute about the appropriate price could be quickly and cheaply resolved by reference to the Expert dispute resolution process, pursuant to clause 23 of the contract.
Ultimately, this sort of co-operation was in the interests of both parties. If a particular minimum price was simply too high in all the circumstances, then it would not benefit either side if it sat there unsold, simply because one or both parties (wrongly) believed that the minimum price in the Fourth Schedule could not be reduced. It seems clear that the Agreement recognised the absurdity of that situation, and accordingly provided for a mechanism by which the prices could be reduced by agreement.
Barratt now suggest that an agreed reduction in the minimum prices, or a reduction fixed by the Expert, might deal with the immediate problem, but would not address the revenue apportionment provisions in clause 10.1. Their argument was that, because Barratt had to build out the scheme, and would incur significant costs in so doing, a reduction in a minimum price should also be reflected in a change (in Barratt’s favour, of course) to the financial apportionment set out in clause 10.
In my view, such a change mechanism was simply not envisaged by clause 10 of the Agreement; on analysis, such a mechanism would be contrary to the express provisions of clause 10. Unlike the provisions relating to the Schedule of Minimum Prices, clause 10 contained no express mechanism pursuant to which the apportionment percentages could be amended or varied. There was no linkage of any kind between clause 10 and the prices in the Fourth Schedule. Far from clause 10 depending on the Fourth Schedule, as Mr Dennys submitted, the financial apportionment was not expressly connected to the minimum prices at all. Moreover, this was unsurprising, because (instead of providing that the £18 million was a guaranteed minimum figure) Clause 10.1.1 expressly provided for the position up to and “until” the total net revenue reached £18 million, and therefore operated to impose the 50/50 split on any total revenue figure that was below £18 million. That was how the Agreement was intended to work, even if the total revenue figure was below £18 million because of agreed reductions in the minimum prices set out in the Fourth Schedule.
Furthermore, if I was wrong about clause 10, then there would be an implied mechanism by which the revenue split could be adjusted, either by agreement or by the decision of the Expert. Even if (which I do not accept for a moment) Mr Dennys was right, and reductions to the prices in the Fourth Schedule meant that clause 10, in its present form, became inoperable, the clause would be severable pursuant to clause 18, and a replacement clause would either be agreed or determined by the Expert, as expressly envisaged in clause 18. Either way, clause 10 did not constitute any sort of difficulty or obstacle to the proper operation of the Agreement, even if the property market became more problematic.
Accordingly, I conclude that the Schedule of Minimum Prices was designed to apportion risk and benefit between the parties. The Schedule was designed to identify, at the outset, the anticipated minimum revenue that would be recovered from the development of the site. But the minimum prices were not fixed. This was not a traditional contract of sale where the vendor recovered a fixed or even a guaranteed minimum sum. Instead, Gold would take advantage of rising house prices so as to obtain a greater recovery for the land, by fixing their recovery not by reference to a specific sum but by reference to a share in the revenue. That brought with it the concomitant risk that house prices might reduce, so that their own recovery would also be less. But it was clear that that risk was inherent in the Agreement. I also note that it was a risk that was spelt out by Barratt to Gold in their letter of 7th February 2007 (see paragraph 12 above).
Barratt stood to benefit from increasing property prices too, particularly if the total revenue went above the £19.5 million mark, when they would recover 100% of the total revenue between that figure and £26 million. But they also ran the risk that, when a particular property was sold, the sale price might be less than the minimum price stated in the Fourth Schedule, whilst the 50/50 split of the revenue remained the same. But it seems to me that that was no different to the risks inherent in any other property development that they took on. The real question was whether Barratt were entitled, pursuant to the Agreement, not to carry out any building works on site at all, because of a concern about the level of prices that might be realised, two years or more later, when the properties came to be sold. Were the minimum prices a condition precedent to the carrying out of the building works on site?
Were the Minimum Prices A Condition Precedent to the Carrying Out of the Building Work On Site?
Mr Dennys submitted that the minimum prices in the Fourth Schedule operated as a condition precedent to the carrying out of any building works on site and that, if there was a risk that the minimum prices could not be achieved, Barratt were entitled, pursuant to the Agreement, not to carry out the works, or as he put it, “to refuse to build out the works on site”.
Contracting parties may enter into an immediate binding contract, but subject to a condition which suspends all or some of the obligations of one or both parties pending fulfilment of the condition: see, by way of a simple example, Smallman v Smallman [1972] Fam.25. Like exclusion clauses, such terms must be clear and unequivocal: see, again by way of example only, Nelson Line (Liverpool) Ltd v James Nelson & Sons Ltd [1908] AC 16.
In the present case, I have no hesitation in concluding that the minimum prices in the Fourth Schedule were not a condition precedent to the carrying out by Barratt of the building works themselves. There is no express term to that effect anywhere in the Agreement, and none was identified during the course of argument. Neither can the other terms of the Agreement be read so as to give rise to such a condition.
The obligation at clause 5.1.1 to supervise the carrying out of the works (paragraph 15 above) and the obligations at paragraph 7 of the Second Schedule to commence, carry out and complete the development following the giving of vacant possession (paragraph 17 above) are all clear and unequivocal. So too is the related obligation at clause 5.2 and paragraph 7.2 of the Second Schedule to complete the development within 30 months. None of these obligations is qualified in any way, and there is no sensible construction of the Agreement that could give rise to the conclusion that these fundamental obligations were somehow subject to the Schedule of Minimum Prices.
Further and in any event, the Schedule of Minimum Prices was not even in the body of the Development Agreement itself. It was a separate schedule, only expressly referred to in the definition of Minimum Price (where it is made clear that the Schedule can be changed and substituted if required). It would turn the Agreement on its head if, in some way, this (variable) Schedule was allowed to take precedence over the basic obligations to commence, carry out and complete the works imposed on Barratt by the critical provisions of the Agreement.
Still further, it is impossible to see how the mere risk that the minimum prices might not be achieved at some stage in the future could act as a condition precedent which would permit Barratt not to carry out the works in the first place. As I explored with Mr Dennys during argument, in 2008/2009, nobody could say what prices these properties would realise when they were built out and sold. It may be that, two years before the completion and the marketing of the properties, there was a risk that the minimum prices would not be achieved but, since the property market habitually goes both up and down, it would make a nonsense of the Agreement to conclude that Barratt were permitted not to build the properties at all, because of something that might or might not happen once those properties had in fact been built.
In essence, Barratt were contending that there was a condition precedent that the commencement and carrying out of building works in 2008/2009 depended upon the possible happening of a future event (i.e. the minimum prices not being achieved) two years into the future. Such a term would be extremely unusual and would, in my judgment, require to be very clearly articulated. The Agreement contains no such term.
Mr Dennys argued that, if there was no such condition precedent, and Barratt were obliged to build out the works at their cost, regardless of the forecast sales figures, they ran the risk that, on completion, they would not be able to realise the profit which they had anticipated and might even make a loss. However, it seems to me that that is again the sort of risk that property developers and house-builders run every time they commence work on a significant project. There was certainly nothing in this Agreement which provided that, in some way, this risk was passed on in its entirety by Barratt to Gold.
It was in support of this position that Mr Dennys referred again to his submission that the financial split provisions in clause 10 were subject to the Schedule of Minimum Prices. I have rejected that argument (see paragraph 53 above). But if I am wrong and there was a link, changes in the financial apportionment could be agreed by the parties or, if there was a dispute, determined by the Expert (paragraph 54 above). Thus, even if there was any connection between clause 10 and the Fourth Schedule, it would not permit Barratt to refuse to meet their primary obligations to carry out and complete the works on site.
Summary
On a true construction of the Development Agreement, I therefore conclude that:
The Schedule of Minimum Prices could be reduced (or increased) by agreement between the parties.
This adjustment mechanism was part of a wider sharing of the risk between the parties that the total revenue may be less than anticipated at the outset.
There was no similar adjustment mechanism in respect of the financial apportionment set out in Clause 10. Clause 10.1.1 dealt expressly with the sharing of revenues up to (i.e. below) £18 million. And if I am wrong about that, any adjustment process would operate in a broadly similar way to the adjustment to the Schedule of Minimum Prices. Either way, clause 10 did not prevent the proper operation of the Agreement.
The Schedule of Minimum Prices was not, therefore, inserted into the Agreement solely for the benefit of Gold, to act as a guaranteed minimum return. Likewise, the Schedule did not operate solely as a benefit to Barratt, in providing them with some sort of condition precedent to the actual carrying out of the works, such that, if they believed that those minimum prices might not be achieved, they were entitled not to carry out and complete the building works.
FRUSTRATION
The Law
The House of Lords restated the test for frustration in National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675 in these terms:
“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”
Echoing the point made at paragraph 44 above, their Lordships described this as “the construction test”. As Lord Radcliffe put it in Davis:
“The description of the circumstances that justify the application of the rule [of frustration] and, consequently, the decision whether in a particular case those circumstances exist are, I think, necessarily questions of law.”
In the modern day, the Courts have repeatedly said that the doctrine of frustration operates within narrow confines. In Pioneer Shipping Limited v BTP Tioxide Limited (The Nema) [1982] AC 724 at 752, it was stressed that frustration is “not likely to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains”. Again this echoes Lord Radcliffe in Davis who said that “frustration is not to be lightly invoked as the dissolvent of a contract”.
In J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyds’ Rep 1, Bingham LJ (as he then was) identified five propositions necessary to establish frustration. In short they were:
The mitigation of the law’s insistence on literal performance of absolute promises so as to avoid injustice.
Because frustration operated ‘to kill the contract’, it was not to be lightly invoked.
Frustration brought an end to the contract forthwith.
The essence of frustration was that it should not be due to the act or election of the party seeking to rely on it and must instead be due to some outside event or extraneous change of situation.
A frustrating event had to take place without blame or fault on the side of the party seeking to rely on it.
Of the different types of frustration noted in the authorities, Barratt’s case comes closest to those cases concerned with the cancellation of an expected event, such as Krell v Henry [1903] 2 KB 740. Barratt’s case, at its highest, is that both sides expected the selling prices of the properties to be no less than the minimum prices in the Fourth Schedule and that this ‘event’ or common assumption was cancelled through the fault of neither party. The other common categories of frustration, namely supervening illegality or delay, do not arise here.
In these circumstances, it is necessary to consider whether or not the event was foreseen or foreseeable. The fact that the parties have foreseen the event but not made any provision for it in their contract will usually, but not necessarily, prevent the doctrine of frustration from applying when the event occurs: see McAlpine Humberoak Limited v McDermott International Inc (1992) 58 Build LR 1 at page 18, compared with Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 at 529. There are a number of authorities which make plain that a foreseen event will generally exclude the operation of the doctrine of frustration.
The leading case on frustration, certainly in a construction context, is Davis v Fareham. In that case the House of Lords rejected the contention that the construction contract was frustrated because adequate supplies of labour were not available to the contractor shortly after the end of the last war. Their Lordships were agreed that, on the facts of that case, the appellant fell some way short of demonstrating frustration. Lord Radcliffe identified the relevant principle in this way:
“So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract………It was not this that I promised to do.”
He then went on to address the facts of that case:
“I am bound to say that, if this is the law, the appellants’ case seems to me a long way from a case of frustration. Here is a building contract entered into by a housing authority and a big firm of contractors in all the uncertainties of the post-war world. Work was begun shortly before the formal contract was executed and continued, with impediments and minor stoppages but without actual interruption, until the 78 houses contracted for had all been built. After the work had been in progress for a time the appellants raised the claim, which they repeated more than once, that they ought to be paid a larger sum for their work than the contract allowed; but the respondents refused to admit the claim and, so far as appears, no conclusive action was taken by either side which would make the conduct of one or the other a determining element in the case. That is not in any obvious sense a frustrated contract…..”
In the same case, Lord Somervell concluded:
“A party contracting in the light of expectations based on data of that or any other kind must make up his mind whether he is prepared to take the risk of those expectations being disappointed. If not, then he will refuse to contract unless protected by some specific provision. There is no such provision here. The appellants took the risk under the contract, and it seems to me impossible to maintain that the contract did not apply in this situation as it remained, the expectations on which the estimate was based not having been realised.”
At my request, following the conclusion of the hearing, the parties provided me with some examples of more recent Court of Appeal cases concerned with frustration. These both demonstrate the relative rarity of a finding of frustration. Thus, in CTI Group Inc v Transclear SA [2008] EWCA Civ 856, the Court of Appeal rejected the claim for frustration, making it plain that, as numerous earlier authorities showed, the fact that a supplier chose not to make goods available for shipment, thus rendering performance by the seller impossible, was not of itself sufficient to frustrate a contract for sale. A similar result, this time in relation to a charter party, can be found in Edwinton Commercial Corporation v Tsavliris Russ (The Sea Angel) [2007] EWCA Civ 547, a case of frustration based on delay.
Was the Development Agreement Frustrated As At 12th January 2009?
It is Barratt’s case that, no later than 12th January 2009, when their solicitors wrote to say so (see paragraphs 38-39 above), the Agreement was frustrated because, by that point, it was clear that the properties were most unlikely to achieve the minimum prices set out in the Fourth Schedule. They argued that, since that fall in the property market was not the fault of either side, it would be unjust to hold them to their literal obligations under the Development Agreement.
On analysis, I consider that the facts and matters relied on by Barratt fall far short of satisfying the legal doctrine of frustration. There are four principal reasons for that.
First, it is clear that both parties foresaw the possibility that the property market would drop and the minimum prices would not be achieved. The potential fall in the value of property is expressly referred to by Barratt in their letter to Gold of 7th February 2007 (see paragraph 12 above), which talked about a fall of 28%. The possibility of a fall was therefore expressly contemplated. In such circumstances, the fall that actually happened could not possibly be described as unforeseen.
Secondly, not only was the event foreseen, but the Agreement made express provision for what should happen if that event (i.e. a need to reduce the minimum prices) occurred. I have already explained that the Agreement expressly permitted the parties to renegotiate the Schedule of Minimum Prices. Such express provision was designed to deal with the situation where Barratt received advice that the minimum prices might not be achieved on completion. Mr Dennys acknowledged in his oral submissions that there was “an effective mechanism for dealing with market value falls such that the minimum prices could not be achieved”. It is, in my judgment, quite impossible to argue that the contract was frustrated in circumstances where the allegedly frustrating event was both foreseen by and dealt with expressly by the terms of the contract between the parties. Despite the forecast fall in property prices, the Agreement in this case was, and remained, capable of performance.
Thirdly, there is no reason for the law to intervene and dissolve this contract. As Bingham LJ made plain in Super Servant Two, frustration only arises at all “to give effect to the demands of justice, to achieve a just and reasonable result, to escape from injustice.” But there is no injustice here, because the minimum prices could be renegotiated and, if they could not be agreed, they could be fixed by the expert pursuant to the dispute resolution mechanism. Both parties have a clear and obvious shared interest in maximising the revenues from the properties so there was considerable incentive to make this Agreement work. There was certainly no injustice to Barratt in obliging them to progress the works whilst at the same time renegotiating the minimum prices.
Mr Dennys complains that there would be an injustice if the financial apportionment in clause 10 could not be altered as well. But I have already said that, on my primary construction of the Agreement, the clause provided that a total revenue below £18 million would be split 50/50, so the parties have already agreed the apportionment of that risk. Barratt cannot now complain if they have made a bad bargain. And if I am wrong about that, the clause 10 apportionment percentages could be adjusted, either by agreement or through the Expert determination clause. Either way, there is no injustice that requires the drastic remedy of frustration.
Fourthly, I should add that, in my judgment, there was in truth no supervening event at all. This is not a case where the subject matter of the contract exploded or was lost, or some other event occurred which could not possibly have been envisaged by the contract, and which deprived both sides of the benefits of the contract. Here, all that had happened was that Barratt had been warned that the minimum prices might not be achieved in the future. Since there was a period of two years minimum between the commencement of the building works on site and the sale of the completed properties, it cannot be reasonably argued that the receipt of a gloomy forecast two years before the properties came onto the market was “an event” in the proper sense of the word. It was clearly something which entitled Barratt to attempt to renegotiate the Schedule of Minimum Prices but, given the time period involved and the volatility of the housing market, the pessimistic forecast received in October 2008 was simply that: a warning of what might happen in the future. It was not the happening of an event which could in principle give rise to the frustration of this agreement.
I should make a number of other points about this aspect of the frustration argument. One of the fundamental difficulties that the appellant had in Davis was its inability to satisfy the House of Lords as to when it could sensibly be said that the contract was frustrated. That same difficulty applies here. Although Mr Dennys maintained that ‘the Agreement was frustrated when the forecast prices dipped below the prices in the Schedule’, that is fraught with uncertainty. How many of the prices had to fall below the line before the Agreement was frustrated? One? Two? All of them? As the prices were forecasts anyway (until the properties were built out), what if the forecasts were fluctuating wildly? Did a comparison between forecast and minimum prices conducted in one week mean that the Agreement was frustrated, when the Agreement would not have been frustrated if the comparison had been done the previous or the following week? There is also the related difficulty that the marketing report of 31st October talked about a possible fall in prices of 20%, which was less than the worst-case scenario of 28% expressly referred to in the letter of 7th February 2007. Similarly, that letter referred to a minimum revenue figure of £17 million, which was less than the £18 million relied on now by Barratt. The evidence is also that property prices have recovered to some extent since late 2008, although the extent of the recovery may be open to debate. All of this simply demonstrates the insuperable practical difficulties of alleging frustration in circumstances such as these.
Finally, it is convenient to disentangle here one of the complaints made by Barratt about Gold which, despite a certain amount of elision in Mr Dennys’ oral arguments, is wholly irrelevant to Barratt’s case on frustration. One of Barratt’s complaints is that, following the meeting of 4th November, and their letter of 19th November 2008, Gold did not renegotiate the revenue split. I deal with that criticism in detail in Section 7.3 below. But, even assuming that Barratt’s criticisms of Gold in this regard were well-founded, and Gold were in breach of the Agreement as a result, that could, at most, give rise to an argument about repudiation and/or a claim for damages for breach. It is wholly irrelevant to the issue as to whether or not the contract was frustrated. Barratt’s pleaded case as to frustration relies on the fall in the property market only, not the failed negotiations. Mr Dennys confirmed that when, in his oral submissions, he said that the Agreement was frustrated once the forecast prices dropped below the stated minimum. The fact that Barratt complained that Gold were in breach of contract in failing to renegotiate in November/December 2008 only confirms my conclusion that the anticipated fall was not an unforeseen or a frustrating event, but instead something which could be addressed by negotiation in accordance with the express terms of the Agreement.
Accordingly, for all these reasons, I have concluded that the Agreement was not frustrated as alleged by Barratt, or at all. On a proper construction of the Agreement, the ‘event’ which occurred (if, contrary to my view, that is what it was) was something which the Agreement expressly contemplated and allowed for. Thus, in the absence of frustration, what matters is whether one or both of these parties were in breach of the terms of the Agreement and, if so, whether or not those breaches amounted to a wrongful repudiation of the Agreement.
BREACHES OF CONTRACT
Were Barratt in Breach of Contract as at 12.01.09?
It is clear beyond doubt that Barratt were in breach of contract by 12th January 2009. This was not ultimately disputed by Barratt. I identify what I consider to be the critical breaches below.
Pursuant to paragraph 7.1 of the Second Schedule to the Agreement, Barratt were obliged to commence work no later than early June 2008. The unchallenged evidence of Mr Gold was that they failed to do so (see paragraph 28 above).
Pursuant to paragraph 7.3.7of the Second Schedule to the Agreement, Barratt were obliged, following commencement of the works, to proceed with those works with due diligence. Again, it is plain from the unchallenged evidence of Mr Gold (see paragraphs 28-29 above) that they failed to do so. Indeed, the evidence is that Barratt carried out next to no work on this site. They did not demolish the buildings and, even though some of those warehouses were destroyed by vandals, at least one other warehouse remained standing. They carried out some preliminary investigations but no start was made on the construction works themselves.
Pursuant to clause 5.2 and paragraph 7.2 of the Second Schedule to the Agreement, Barratt were obliged to complete the works within 30 months of commencement. That was a date in early January 2011. By January 2009, with demolition not complete and no building works at all having been commenced, that date was simply unachievable.
As I have said, beyond the unsuccessful arguments of law as to the condition precedent and frustration, Barratt did not endeavour to deny these defaults. Their general attempt to justify these failures now rests on the advice which they received as to the likely selling prices of the properties. However, even that case does not bear closer analysis.
First, there is the question of timing. As set out in paragraphs 31-32 above, Barratt did not raise the question of the minimum prices with Gold until the meeting on 4th November 2008. That was five months after they should have, but failed to, commence the works on site. No justification for that five month delay is put forward in the documents or in the evidence of Mr Champion. Thus, even on Barratt’s own case, they were in breach of contract in the ways particularised in paragraphs 86-88 above without any justification whatsoever.
From 4th November 2008 onwards, Barratt were putting forward different proposals as to the restructuring of the financial apportionment in clause 10. On my primary view of the terms of the Agreement, that was illegitimate: see paragraph 53 above. But even if that was wrong, and the apportionment in clause 10 could be altered by agreement or by the Expert, the fact that those proposals were offered and/or were being considered by Gold did not provide any sort of reason or excuse to Barratt for failing to commence the building works. Thus the fact that an attempt was being made at negotiation (albeit an illegitimate attempt to change clause 10 rather than a bona fide attempt to agree a new Schedule of Minimum Prices) did not relieve Barratt of their obligations to commence and carry on with the works. Thus, the breaches noted at paragraphs 86-88 above were continuing up to 12th January 2009.
During the course of his submissions, Mr Dennys referred me to clause 6.1 of the Agreement, which required Barratt to produce an updated Development Plan, and clause 6.4 which required Barratt to produce a Marketing Plan. He accepted that Barratt had produced neither of these documents prior to 12th January 2009, or at all. On the face of it, therefore, those failures comprised further breaches on the part of Barratt. As I understand it, Barratt contend that they were unable to carry out either of these tasks until the minimum prices had been renegotiated. I do not accept that for a variety of reasons. First, it seems to me that the updated Development Plan and the Marketing Plan were always going to need to be revised and produced respectively, probably on a number of occasions, during the time that the building works were carried out on site. The two Plans should therefore have been produced. Secondly, if Barratt considered that the Schedule of Minimum Prices needed to be renegotiated then these documents provided one clear and contractual vehicle by which their proposals could have been properly spelt out in detail for Gold to consider.
Finally on this point, I should add that if, as Barratt now claim, the critical thing was to get Gold to agree the new Minimum Prices (even if, according to their case, that went hand-in-hand with the need to alter clause 10), then at the very least Barratt should have proposed the changes they wished to make to the Fourth Schedule. They did not do so. Thus they cannot blame Gold for their own failure to produce either a new Fourth Schedule, or the updated Development Plan, or the Marketing Plan. In the circumstances, all of these documents were for Barratt to prepare, and they failed to produce any of them.
Accordingly, for all of the reasons set out above, it is plain that Barratt were in breach of contract as at 12th January 2009. As I have said, there is a marked lack of contrary evidence from Barratt in relation to any of these failures, and no evidence to counter Mr Gold’s statement which highlights in particular the breaches identified at paragraphs 86-88 above.
Were Gold in Breach of Contract as at 12th January 2009?
The principal allegation against Gold is that they refused to consider any renegotiation either at the meeting on 4th November or thereafter. Accordingly, Barratt say that Gold were in breach of the terms of the Agreement which obliged the parties, in appropriate circumstances, to renegotiate the minimum prices.
I consider that, whilst I do not have sufficient evidence to decide whether Gold were in breach of contract in failing to renegotiate the terms of the Agreement in late 2009, it is at least arguable that Gold were in breach. Amongst the missing material is any evidence about what happened at the meeting on 4th November 2008. This is potentially important to this aspect of the dispute, because it was the first time that the fall in property prices was raised by Barratt as a reason for renegotiation.
I consider that the following matters, which are in evidence, demonstrate an arguable breach on the part of Gold. Their letter of 17th December 2008 over-stated their contractual position and expressly failed to appreciate that the Schedule of Minimum Prices was not included in the Development Agreement solely for their benefit. It does not seem that they were aware of the principle that they were required to consider proposed changes to the Fourth Schedule. Furthermore, Barratt had made one proposal (albeit to amend the revenue apportionment) because of the gloomy forecast and, so it seems to me, it must at least be arguable that Gold’s refusal to come back with any financial counter-proposal of any sort, given the co-operation clauses and the underlying nature of the Agreement, might constitute a breach of the Agreement.
I accept, as far as it goes, Mr Acton Davis’ submission that Gold cannot be criticised for failing to agree to lower minimum prices, because such minimum prices had not even been suggested by Barratt. But I have already made the point that this Agreement envisaged much closer co-operation between the parties than an ordinary arm’s length contract for the sale of land. It is plain that Barratt were proposing changes because of the drop in the market and, even if a change to clause 10 itself was not warranted, it might be argued that Gold should have been more proactive in their dealings with Barratt so as to ensure that the Agreement continued to operate. .
Accordingly, it seems to me that, at least arguably, Gold were also in breach of the terms of the Development Agreement as at 12th January 2009. A final decision would require further evidence about the events between the end of October 2008 and 12th January 2009. This would in turn allow Barratt to search for the files of Barratt Thames Valley, and to interview Mr Tuthill (although it is unlikely that he will be able to offer much assistance, given that it was apparently Mr Lees-Uff who was dealing with Gold during the relevant period) (Footnote: 3).
Summary
For the reasons set out in Section 7.1 above, I am in no doubt that Barratt were in breach of the Agreement. For the reasons set out in Section 7.2 above, I have concluded that it is at least arguable that Gold were also in breach of contract. Further evidence will be required on that aspect of the dispute.
The remaining question then becomes whether Barratt or Gold (or both) were arguably in repudiatory breach of contract and, if so, whether that wrongful repudiation was accepted by the other party.
REPUDIATION
Applicable Principles of Law
If a party to a contract is in breach of that contract, the other party has a claim for damages. If the breach amounts to the manifestation of an intention on the part of the wrongdoer no longer to be bound by the terms of the contract, the breach will be treated as repudiatory and may be accepted as such by the innocent party. Whether or not the breach will be regarded as repudiatory depends largely on the nature of the contractual term in issue and the nature and extent of the breach.
A failure of performance which constitutes a breach of condition entitles the innocent party to treat himself as discharged from further liability under the contract: see Chitty on Contracts, 30th ed., paragraphs 12-025 and 24-040. Where the failure of performance is not a breach of condition, but of an ‘intermediate’ term, it may still amount to repudiation, depending on the nature and consequences of the breach. In all circumstances, for repudiation, the breach must “go to the root of the contract”: see Federal Commerce and Navigation Co. Ltd v Molena Alpha Inc. [1979] AC 757, 779.
If both parties are alleged to have committed a breach and it is asserted that each breach, taken independently give rise to a right to terminate, regard must be had to the order in which the breaches occurred: see State Trading Corp of India v M Golodetz Ltd [1989] 2 Lloyds’ Rep 277. While a party who has committed a repudiatory breach of contract is not entitled to enforce the contract against a party who is ready and willing to perform his obligations under the contract, it has been suggested that it does not follow that the fact that a party that has committed a repudiatory breach should preclude him from accepting a repudiatory breach committed by the other party: see Chitty, paragraph 24-016.
The general rule is that an innocent party must accept the repudiation of the other, although an act of acceptance of a repudiation requires no particular form: see Stocznia Gdanska SA v Latvian Shipping Co. [2002] 1 Lloyds’ Rep 436. However, as the State Trading case makes plain, it may sometimes be sufficient simply to lead evidence of an unequivocal overt act by the innocent party which is inconsistent with the subsistence of the contract, without any concurrent manifestation of intent directed to the other party. If the repudiation is not accepted and the innocent part elects to treat the contract as continuing, then it remains in existence for the benefit of the wrongdoer as well as of the innocent party: see Suisse Atlantique Societe d’Armement Martime SA v MV Rotterdamsche Kolen Centrale [1967] 1 AC 361.
Did Barratt Repudiate the Contract in 2009?
On the face of it, Barratt wrongfully repudiated the Agreement no later than 12th January 2009, and possibly before. They failed to comply with their critical obligations under the Agreement, namely their obligations to commence, carry out and complete the building works on site. Those were conditions, not intermediate terms, because they were so important. In my judgment, Barratt’s failure to comply with them went to the root of the contract. Thereafter, on 12th January 2009, they wrongly treated the contract as frustrated and did not carry out any further works on site. Two months or so later they put the keys through the letterbox on the hoarding, a sure sign that they did not intend to comply further with this Agreement.
Barratt had two principal defences to the allegation that they were in repudiatory breach of contract. One was to argue that the achieving of the prices set out in the Fourth Schedule was in some way a condition precedent to the carrying out of the works. I have rejected that argument as a matter of construction of the Agreement in Section 5.2 above. The second argument was to allege that the contract was frustrated, and I have rejected that argument as a matter of law, in Section 6 above. That therefore leaves Barratt’s defence to the claim for repudiation hanging by a relatively slender thread.
However, I have concluded that, although it is slender, there is one possible argument open to Barratt which I cannot at this point describe as fanciful. That is their argument to the effect that, because Gold were in breach of the Agreement (because they did not renegotiate or even contemplate renegotiation in November/December 2008), it was actually Gold who wrongfully repudiated the Agreement.
I do not regard this argument as having a strong chance of success. It seems to me that, if the problem was simply the need to agree lower prices, Barratt should have proposed them; they should not, without more, simply have treated the Agreement as being at an end. However, I have already said that I require further evidence as to the detail of the negotiations during that period and, until that evidence is considered, it is difficult for me to say whether or not Gold were in breach and, if they were, whether or not that breach could be said to be repudiatory.
For those reasons, although on the face of it Barratt were in repudiatory breach of the Agreement by 12th January 2009, I consider that there is one last element of their defence to that allegation still open to them which would require evidence to determine. In those circumstances, the alleged repudiation by Barratt ought not to be the subject of a judgment on liability under CPR Part 24. However, because of my doubts about the strength of this remaining defence, I would only grant Barratt conditional leave to defend the repudiation claim brought against them.
Did Gold Accept Barratt’s Repudiation?
The other reason why I am not presently prepared to give summary judgment on the repudiation element of the case is the muddle which exists, on the face of the documents, from 12th January 2009 onwards. Although it is clear that Barratt were no longer prepared to do any work on site, which would in normal circumstances give rise to the clearest possible evidence of repudiation, Gold’s acceptance of that repudiation is surprisingly unclear. I note in particular:
There was no reply whatsoever to Barratt’s solicitors’ letter of 12th January 2009. Thus, on the evidence before me, it is arguable that the repudiation evinced in the letter of 12th January was not actually accepted by Gold.
When Gold did respond, towards the end of March 2009, their response (see paragraph 41 above) was equivocal. I do not presently read that letter as being an unqualified acceptance of Barratt’s repudiation of the contract: on one view, it says the opposite. The letter will have to be considered against the evidence of the relevant factual background, which I do not currently have.
There was apparently a meeting at the end of March 2009 between Mr Gold and Mr Lee-Uff to discuss this very issue. I have no evidence whatsoever about that meeting. It seems to me that what was said on that occasion may be of critical relevance to the issue of acceptance of the repudiation or affirmation of the Agreement.
On the face of the documents, nothing then happened for a further five months. I will need to know why. Moreover, Gold’s letter of 12th August is attempting a difficult exercise in purporting to give notice of potential termination, if (which the letter denies) the Agreement still subsisted. The letter also refers to an earlier acceptance of repudiation which, for reasons that I have given, is not clear on the evidence before me at present.
Accordingly, it seems to me that the events both before and after the letter of 12th January 2009 are not clear enough to warrant summary judgment on the repudiation claim. Barratt have also raised the point that, even if they were in repudiatory breach of contract, that repudiation was not accepted by Gold and that, on the contrary, Gold affirmed the continuing nature of the Agreement. I am again unable to resolve that issue without evidence.
CAUSATION AND LOSS
During the course of his submissions, both written and oral, Mr Dennys made a number of points as to causation and loss, and the alleged difficulties that he said Gold would have in being able to establish either of them in the present case. In general terms, it seems to me that such matters are of limited relevance to the issues before me on this application, since Gold merely seek summary judgment, with damages to be assessed. However, questions of causation and loss are not entirely irrelevant to this application, because I have concluded that, in all the circumstances of this case, I ought to grant Barratt conditional leave to defend the repudiation claim. Gold’s potential recovery against Barratt is therefore likely to be at least one element in calculating an appropriate sum for Barratt to pay into Court as a condition for defending the claim.
Gold’s claim is for the profit lost as a result of the failure by Barratt to proceed with the Agreement, in the sum of £9.5 million odd. That claim appears to assume that the site is now worthless, which cannot be right. At the very least, therefore, the £9.5 million figure is a gross figure, or one side of the equation only, to be reduced by the value of the site, the value of the work done by Barratt (if any) and so on.
Furthermore, if on the evidence the prices in the Fourth Schedule should have been reduced by agreement because they were too high, the £9.5 million would be too high a starting-point for the calculation of lost profit. The £9.5 million figure assumes that the total revenue actually achieved did not drop below £18 million. But, because the Agreement envisaged the sharing of the risk that prices would go down as well as up, the loss of profit claim will have to reflect the possibility that minimum prices in the Fourth Schedule would have had to have been modified. In those circumstances, the correct loss of profit figures may not be easy to ascertain.
On the face of it, a claim by Gold for the costs and losses caused by the delays would be much more straightforward. On that hypothesis, Barratt’s breaches of contract, if nothing else, significantly delayed the completion of this major project. Gold may be able to recover those losses in any event. If the repudiation argument is successful, there may also be a claim for the increased costs of the works themselves.
No detailed figures of any sort are put forward by Gold. However, I acknowledge that this was intended to be a major development with total sales revenues projected anywhere between £18-25 million and an expected (if ultimately unachievable) profit of £9.5 million. Accordingly, it seems to me that, assuming a proven case on repudiation, the damages recovered by Gold in consequence are likely to be substantial, even if rather less than the sums currently claimed.
CONCLUSIONS
My conclusions as to the true construction of the Agreement are set out in Section 5 above. The most significant of these is my conclusion that the Fourth Schedule and the minimum prices set out there did not operate as a form of condition precedent to the carrying out of the building works on site. The potential fall in property prices did not allow Barratt to refuse to carry out and complete any of those works.
For the reasons set out in Section 6 above, I have concluded that this Agreement was not frustrated. If (which I doubt) an ‘event’ occurred, it was no more than a forecast drop in property prices, which was foreseen: it was expressly discussed during the pre-contract negotiations and was allowed for in the terms of the Development Agreement itself.
For the reasons set out in Section 7 above, I have concluded that Barratt were in unequivocal breach of critical terms of the Agreement. I have also concluded that it is at least arguable that Gold were also in breach of the terms of the Agreement, and that further evidence on this aspect of the dispute will be necessary.
For the reasons set out in Section 8 above, I have concluded that, whilst Barratt were prima facie in repudiatory breach of the Agreement, there is a potential argument open to them (which I cannot decide without evidence) to the effect that Gold’s failure to re-negotiate was not only a breach of the Agreement, but was itself repudiatory. I do not regard that argument as strong, but it is not fanciful. In addition, I cannot resolve Barratt’s further argument – that, even if they were in repudiatory breach, it was not accepted by Gold – without requiring more evidence about the post-12th January 2009 events.
Given my rejection of the two principal planks of Barratt’s submissions (namely the alleged condition precedent and the frustration of the Agreement), and my firm conclusion that Barratt were in breach of fundamental conditions of the Agreement, certain elements of Gold’s claim against Barratt have been made out; indeed, on Gold’s pleaded case, the only remaining liability issues arise out of the repudiation arguments. Even there, Barratt’s position is not strong. In those circumstances, I propose:
To declare that Barratt were in breach of the terms of the Agreement in the particular circumstances set out in paragraphs 86-88 above;
To give Barratt conditional leave to defend the other allegations made against them, including in particular the allegation of repudiation;
To require Barratt to make a significant payment into court as a condition of granting them leave to defend;
To give directions for the speedy trial of the limited issues noted in Sections 7.3 and 8 above.
I will consider the parties’ submissions as to the amount of the payment into Court and the appropriate directions. But my preliminary view as to the amount of the payment is that it should be in the order of £500,000, in order to reflect the likely losses which have been caused by the failure on the part of Barratt to build out the works. The range of claims and figures that may be involved at any subsequent quantum hearing are set out in Section 9 above.
As to the necessary directions, I do not envisage the hearing on the limited liability issues which remain taking longer than 2 days, and that trial should be fixed for April or May 2010, following the disclosure of any other relevant documents by either side, and the preparation of witness statements dealing with the situation from the end of October 2008 until September 2009. No expert evidence will be required.