Contract – Repudiatory breach – Implied term – Defendants entering oral agreement to introduce claimants to properties to purchase and resell at profit – Dispute arising about terms of agreement – Whether defendants in repudiatory breach of agreement – Whether agreement establishing partnership – Whether claimants entitled to retain profits from sale of properties – Claim allowed
The claimants were husband and wife. The first defendant was an estate agent. The second defendant was a company of which the first defendant was the sole director and shareholder.
A dispute arose concerning the terms of an oral agreement made by the claimants and the first defendant. The agreement provided for the first defendant to introduce suitable investment properties to the claimants to purchase in their sole names and subsequently resell at a profit.
The claimants acquired three properties following an introduction by the first defendant pursuant to the agreement which required the first defendant to manage the properties pending their resale. The first defendant was to be paid 50% of any net profit made on sale of the properties.
The claimants asserted that the first defendant committed repudiatory breaches of the agreement by, among other things, wrongfully failing to account to the claimants for rent received on the properties. The claimants argued that they accepted those breaches and brought the agreement to an end. The claimants continued to own the properties and said that, since they had not sold any of them by the date the agreement terminated, they were not obliged to pay the first defendant a share of any profits made when the properties were sold.
The defendants argued that the agreement established a partnership between him and the claimants and that the properties were partnership property so that he had a proprietary interest in the properties. Further, the claimants had acted wrongly by denying the existence of the partnership and seeking to retain income and capital profits from the properties contrary to the terms of the agreement.
Held: The claim was allowed.
(1) In order to imply a term into the contract, the term in question had to satisfy the test of “business necessity”. The fact that an implied term was reasonable was not sufficient; nor was it sufficient that the parties might have agreed to that term had it been suggested to them: Marks & Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8.
On the evidence, there was a clear understanding that the first defendant was to obtain no proprietary interest in the properties. It followed that the claimants made no representation to the effect that he would obtain such an interest. Nor did they fail to correct any misapprehension on the first defendant’s part that he was entitled to an interest in the properties since he realised he would obtain no such interest.
(2) The claimants and the first defendant were not carrying on “business in common” to establish a partnership under section 1 of the Partnership Act 1890. The reality was that the claimants and the first defendant were carrying on separate businesses: the claimants’ business was of property dealing; the first defendant was an estate agent and property manager. The claimants engaged the service of the first defendant’s business with a view to making profits in their own property dealing venture. The parties were to share in the profits of realisation of the properties, but in their capacities as owners and operators of separate businesses, not as partners. It followed that their business relationship was close and their goals similar but that was not indicative of a partnership because the parties were entering into their dealings as operators of separate businesses. Accordingly, the agreement did not establish a partnership between the claimants and first defendant.
(3) One of the breaches of contract on which the claimants relied were said to involve breaches of “conditions” of the agreement. Accordingly, the court should approach matters on the footing that any breaches of the agreement were of “intermediate terms”. It was, therefore, necessary to have regard to the nature and consequences of any breach. The question, in essence, was whether those breaches “go to the root of the contract”, or “affect the very substance of the contract”. The question was whether the first defendant’s breaches of contract deprived the claimants of substantially the whole benefit which it was the intention of the parties, as expressed in the agreement, that they should obtain as consideration for their promise to pay the first defendant 50% of net profits arising on sale of the properties: Hong Kong Fir Shipping Co Ltd v Kawaski Kisen Kaisha Ltd [1962] 2 QB 26 followed.
(4) The breaches of contract involved a failure to account for material sums of money combined with instances of non-disclosure of sums that had been received. Those breaches took place in the context of a contractual relationship in which the claimants were reposing trust in the first defendant and went to the very root of the contract. It followed that the claimants were entitled to bring the agreement to an end.
The first defendant had no proprietary interest in the properties, or in rents receivable on the properties, by virtue of a constructive trust based on common intention. There was no common intention that the first defendant should have any proprietary interest in the properties. He would instead, provided he complied with his obligations under the agreement, obtain a payment of 50% of the net profits arising on sale of a property. Therefore, by retaining rent, without applying it to pay expenses, they were in breach of the agreement.
(5) There was no basis on which the first defendant could obtain an interest in the properties under the principles of proprietary estoppel. The claimants made no unequivocal representation that the first defendant would obtain an interest in the properties and correctly concluded that they were simply engaging the services of first defendant’s separate business on terms that provided for him to receive a proportion of the net profits made on sale of the properties.
(6) The court rejected the first defendant’s claim for a payment, based on restitutionary principles, for the work done to date under the agreement. There was no scope for a restitutionary remedy where the parties had agreed, pursuant to the agreement, that the first defendant’s obligations were entire so that he would acquire a right to payment only after he had performed all his obligations under the agreement: Cleveland Bridge UK Ltd v Multiplex Construction UK Ltd [2010] EWCA Civ 139 followed.
Benjamin Fowler (instructed by Eldwick Law) appeared for the claimants; Barnaby Hope (instructed by Berlad Graham LLP) appeared for the defendants.
Eileen O’Grady, barrister
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