Clause in lease giving lessees option to purchase the freehold reversion — Clause provided that option was to be activated by notice from lessees and that the price was such as might be agreed by two valuers, one to be nominated by the lessors and the other by the lessees, or, in default of such agreement, by an umpire appointed by the two valuers — Lessees gave notice of their desire to purchase the reversion in accordance with time-
This was an
appeal from a decision of the Court of Appeal by Sudbrook Trading Estate Ltd,
lessees of four adjacent industrial premises in High Orchard Street, Llanthony,
Gloucester. The Court of Appeal had allowed an appeal by the lessors, William
Vernon Eggleton, Thomas H D Keck and Alan G Keddie, from a decision of Lawson
J, who had granted certain declarations in favour of the lessees. The decision
of the Court of Appeal is reported at (1981) 260 EG 1033, [1981] 2 EGLR 56.
Peter Millett
QC and Martin Roth (instructed by Field, Fisher & Martineau, agents for
Rickerbys, of Cheltenham) appeared on behalf of the appellants; E G Nugee QC
and Roger Kaye (instructed by Stevensons, agents for Taynton & Son, of
Gloucester) represented the respondents.
In his speech
allowing the appeal, LORD DIPLOCK said: The appellants (‘the lessees’) are
lessees of four adjacent industrial premises in Gloucester under four separate
leases entered into in 1949, 1955, 1966 and 1968 respectively for various terms
of years all of which expired on the same date, viz December 24 1997. Each
lease contained a clause in identical terms, save as to the minimum purchase
price, which purported to confer upon the lessees an option to purchase the
freehold reversion to the premises from the lessors of whom the respondents,
who are trustees, are the successors in title. These option clauses were in the
following terms, which are taken from the 1955 lease, and the words upon which
the instant appeal will turn are italicised.
AND IT IS
HEREBY AGREED AND DECLARED:–
9. That if
the Lessees shall desire to purchase the reversion in fee simple in the
premises hereby demised and having paid all rent then due and duly
performed and observed the covenants and conditions on their part herein
contained shall at any time not later than six months before the
expiration of the said term but after the expiration of the first twenty one
years thereof and during the life of the survivor of the Lessors children Susan
Margaret Keck Valerie Josphine Keck Rosemary Veronica Keck and Jeremy Hamilton Halls
Keck give to the Lessor notice in writing to that effect the Lessees shall
be the purchasers of such reversion as from the date of such notice at such
price not being less than twelve thousand pounds as may be agreed upon by two
Valuers one to be nominated by the Lessor and the other by the Lessees or in
default of such agreement by an Umpire appointed by the said Valuers subject
to the conditions following namely:–
(a) The purchase money shall be paid and the
purchase completed on such one of the quarterly days appointed for payment of
rent as shall happen next after the expiration of six calendar months from the
date of such notice.
(b) The Lessees shall pay all rent up to the day
appointed for completion of the purchase including the rent due on that day.
(c) The title shall commence with a Trust Deed
made the ninth day of August One thousand eight hundred and ninety eight
between Matthews and Company Limited of one part and Albert Estcourt William
Henry Isaac Pryer and John Albert Matthews of the other part.
(d) The sale shall in other respects be subject
to the Law Society’s Conditions of Sale (according to the edition current at
the date of such notice) so far as the same are applicable to a private sale.
What, one may
ask, could be clearer, fairer or more sensible than that?
After expiry
of the first 21 years of the term the lessees gave to the lessors notice in
writing of their desire to purchase the reversion in fee simple to the 1955,
1966 and 1967 leases and nominated their own valuer. They requested the lessors
to nominate their valuer; but this the lessors refused to do. Hence these
proceedings.
By their
statement of claim, dated February 19 1980, the lessees claimed against the
lessors the following relief:
1.
Declarations that upon the true construction of:
(i) the 1949 lease
(ii) the 1955 lease
(iii) the 1966 lease
(iv) the 1968 lease
the said
clauses therein respectively contained confer on the plaintiff valid options to
purchase the reversions in fee simple in the premises thereby respectively
demised.
2.
Declarations that upon such construction as aforesaid and in the events which
have happened the options contained in:
(i) the 1955 lease
(ii) the 1966 lease
(iii) the 1968 lease
have been
validly and effectually exercised.
3.
Declarations that the contracts constituted by the exercise of the options
contained in:
(i) the 1955 lease
(ii) the 1966 lease
(iii) the 1968 lease
ought to be
specifically performed and carried into execution in accordance with the
conditions contained in the respective clauses of such leases.
4. That
directions may be given as to the nomination of a valuer or valuers by or on
behalf of the defendants.
5. All such
futher directions and inquiries as may be requisite.
6. Damages in
addition to specific performance.
7. Further or
other relief.
8. Costs.
Lawson J,
before whom the action was heard in Bristol in November 1980, where he sat as
an additional judge of the Chancery Division, made the first two declarations
sought but declined at that stage to grant any of the other relief claimed. His
attitude may be summarised as being ‘wait and see’, and he gave liberty to
apply.
What did
happen, though not without some waiting, was that the lessors sought and
obtained leave to appeal out of time to the Court of Appeal against this
judgment. The Court of Appeal in a unanimous judgment delivered by Templeman LJ
allowed the appeal, holding, with expressed regret, that they were bound by an
unbroken series of authorities, starting as long ago as Milnes v Gery
(1807) 14 Ves Jr 400, to allow the appeal. For my part, I think they were
so bound. Templeman LJ’s judgment refers to and incorporates an adequate and
lucid statement of the facts and rationes decidendi of all the relevant
authorities. My noble and learned friend, Lord Fraser of Tullybelton, in his
speech, with which I would express my entire agreement, also cites the most
important of them. I do not propose to refer to them individually myself since
I accept that the principles that they establish are accurately summarised by
Templeman LJ in the following passage of his judgment (the ‘essential term’
referred to being, in the instant case, the purchase price of the reversion in
fee simple to the lease):
First, in
ascertaining the essential terms of a contract, the court will not substitute
machinery of its own for machinery provided by the parties, however defective
that machinery may prove to be.
Secondly,
where machinery is agreed for the ascertainment of an essential term, then
until the agreed machinery has operated successfully, the court will not decree
specific performance, since there is not yet any contract to perform.
Thirdly,
where the operation of the machinery is stultified by the refusal of one of the
parties to appoint a valuer or an arbitrator, the court will not, by way of
partial specific performance, compel him to make an appointment.
All three of
these principles stem from one central proposition, that where the agreement on
the face of it is incomplete until something else has been done, whether by
further agreement between the parties or by the decision of an arbitrator or
valuer, the court is powerless, because there is no complete agreement to
enforce.
The
authorities binding on the Court of Appeal in which these principles are
established do not include any decisions of this House. Even before the change
of practice of this House, announced in 1966, they would not have been binding
upon your Lordships. It is open to the House to consider whether in the 1980s
it remains consistent with a just and rational system of law to continue to
apply those principles to an option to purchase land granted in terms similar
to those used in the option clauses that are the subject-matter of this appeal,
so as to enable the grantor, by the simple expedient of refusing to appoint a
valuer, to deprive the grantee of any legal right to obtain title to the land.
If a majority of your Lordships are
injustice then, despite the antiquity and consistency of the previous
authorities, it will be the duty of this House to overrule them.
The option
clause in each lease was obviously intended by both parties to the lease to
have legal effect; that is to say, to create legally enforceable rights and
obligations. What other reason could there be for going to the trouble of
inserting those elaborate and carefully drafted provisions in the lease?
The option
clause cannot be classified as a mere ‘agreement to make an agreement’. There
are not any terms left to be agreed between the parties. In modern terminology,
it is to be classified as a unilateral or ‘if’ contract. Although it creates
from the outset a right on the part of the lessees, which they will be
entitled, but not bound, to exercise against the lessors at a future date, it
does not give rise to any legal obligations on the part of either party unless
and until the lessees give notice in writing to the lessors, within the
stipulated period, of their desire to purchase the freehold reversion to the
lease. The giving of such notice, however, converts the ‘if’ contract into a
synallagmatic or bilateral contract, which creates mutual legal rights and
obligations on the part of both lessors and lessees.
The first
obligation upon each of them, once the contract has become synallagmatic, is to
appoint their respective valuers to fix what is the fair and reasonable price
for the reversion. That this is a primary obligation under the contract follows
from the use of the words ‘to be nominated’, but it would, in my view,
also be a necessary implication to give business efficacy to the option clause.
The requirement that the price to be so fixed is one that will be fair and
reasonable as between lessors and lessees, appears to me to be a necessary
implication from the description ‘valuers’ applied to the persons by whom the
price is to be fixed by agreement between them, if possible, and from the
description ‘umpire’ applied to the person by whom the price is to be fixed if
the valuers cannot agree. The term ‘Valuer’ (with a capital ‘V’ at any rate) is
used nowadays to denote a member of a recognised profession comprised of
persons possessed of skill and experience in assessing the market price of
property, particularly real property.
The obligation
of both lessors and lessees upon appointing their respective valuers is to
instruct them to carry out the functions for which the option clause requires
that they should be appointed, viz to try to reach agreement with one another
upon a price for the reversion that is fair and reasonable as between the
lessors and the lessees, and, failing such agreement, to agree upon and appoint
a suitably qualified impartial person to fix such price.
The option
clause, to which the lessors and lessees alone are parties, cannot of itself
impose upon the valuers any legal duty to endeavour to reach agreement with one
another as to a fair and reasonable price for the reversion, or if they fail to
do so, to agree upon what person is to be appointed by them jointly as umpire
to fix the price. But that this, which is stressed in several of the cases
cited by Templeman LJ, presents an obstacle to compelling performance of the
contract contained in the option clause is a proposition that on examination,
proves, in my opinion, to be illusory. If a valuer appointed by the lessors or
lessees does not carry out the instructions given him by his appointor, but, in
default of agreement with his fellow valuer upon the price, fails to agree with
him upon the person to be appointed as umpire, the valuer will be in breach of
his own contract with his appointor; his appointment can be revoked and a fresh
valuer, who will comply with his instructions, appointed in his stead. In the
(improbable) event contemplated, in my view it would by necessary implication
be a contractual duty owed by the lessors and lessees to one another under the
option clause to adopt this course.
So if both
lessors and lessees carry out their primary contractual obligations to one
another, under the option clause, the result will be a conveyance by the
lessors to the lessees of the reversion in fee simple to the demised premises
upon the completion date fixed for completion by paragraph (b) of the clause at
a price agreed upon between valuers appointed by each party or failing such
agreement determined by an umpire appointed jointly by the valuers. Until such
conveyance and payment the contract remains executory; but so does any other
contract for the sale of land. What Templeman LJ refers to in his summary of
the effect of the authorities as the one central proposition from which the
three principles that he states all stem, viz until the price has been fixed by
the method provided for in the contract ‘there is no complete agreement to
enforce’, involved a fundamental fallacy. A contract is complete as a contract
as soon as the parties have reached agreement as to what each of its essential
terms is or can with certainty be ascertained: for it is an elementary
principle of the English law of contract id certum est quod certum reddi
potest. True it is that the agreement for the sale of land remains
executory until transfer of title to the land and payment of the purchase
price; but if this is the sense in which the agreement is said not to be
complete it is only executory contracts that do require enforcement by the
courts; and such enforcement may either take the form of requiring a party to
perform his primary obligation to the other party under it (specific
performance) or, if he has failed to perform a primary obligation, of requiring
him to perform the secondary obligation, that arises only upon such failure, to
pay monetary compensation (damages) to the other party for the resulting loss
that he has sustained.
My Lords, the
real issue in this case is not whether the option clause when brought into
operation by written notice given by the lessees to the lessors converted an
‘if’ contract into a synallagmatic contract for the sale of the reversion in
fee simple in the premises that are the subject of the lease, of which the
lessors were in breach at the date of the commencement of the proceedings
before Lawson J by their refusal to appoint a valuer and are now in further
breach by their failure to convey the fee simple to the lessees on the date
fixed for completion by that clause. For reasons that I have already given I
have no doubt that it did; but the real issue is whether the court has
jurisdiction to enforce the lessors’ primary obligation under the contract to
convey the fee simple by decreeing specific performance of that primary
obligation, or whether its jurisdiction is limited to enforcing the secondary
obligation arising on failure to fulfil that primary obligation, by awarding
the lessees damages to an amount equivalent to the monetary loss they have
sustained by their inability to acquire the fee simple at a fair and reasonable
price, ie for what the fee simple was worth. Since if they do not acquire the
fee simple they will not have to pay that price, the damages for loss of such a
bargain would be negligible and, as in most cases of breach of contract for the
sale of land at a market price by refusal to convey it, would constitute a
wholly inadequate and unjust remedy for the breach. That is why the normal
remedy is by a decree for specific performance by the vendor of his primary
obligation to convey upon the purchaser’s performing or being willing to
perform his own primary obligations under the contract.
Why should the
presence in the option clause of a convenient and sensible machinery for
ascertaining what is a fair and reasonable price, which the lessors, in breach
of their contractual duty, prevent from operating, deprive the lessees of the
only remedy which would result in justice being done to them? It may be that where upon the true
construction of the contract the price to be paid is not to be a fair and
reasonable one assessed by applying objective standards used by valuers in the
exercise of their professional task but a price fixed by a named individual
applying such subjective standards as he personally thinks fit, and that
individual, without being instigated by either party to the contract of sale,
refuses to fix the price or is unable through death or disability to do so, the
contract of sale is thereupon determined by frustration. But such is not the
present case. In the first place the contract upon its true construction is in
my view a contract for sale at a fair and reasonable price assessed by applying
objective standards. In the second place the only thing that has prevented the
machinery provided by the option clause for ascertaining the fair and
reasonable price from operating is the lessors’ own breach of contract in
refusing to appoint their valuer. So if the synallagmatic contract created by
the exercise of the option were allowed to be treated by the lessors as
frustrated the frustration would be self-induced, a circumstance which English
law does not allow a party to a contract to rely on to his own advantage. So I
see no reason why, because they have broken one contractual obligation, the
lessors should not be ordered by the court to perform another contractual
obligation on their part namely to convey the fee simple in the premises to the
lessees against payment of a fair and reasonable price assessed by applying the
objective standards to which I have referred.
As regards the
assessment of the fair and reasonable price to be paid by the lessees upon specific
performance of the contract to convey, the lessors have clearly waived their
contractual right to have that price assessed by the machinery for which the
option clause
corresponding right to use that machinery. This will leave it to the court
itself to determine upon the expert evidence of valuers what is the fair and
reasonable price. In these circumstances I do not find it necessary to decide
whether in the absence of such waiver by the lessees the court would have
jurisdiction to compel the lessors to appoint a valuer; but it must not be
taken that I am accepting that it would not. I do not accept as fit for
survival in a civilised system of law any of the three principles extracted
from the authorities that are summarised in the passage that I have quoted from
the judgment of Templeman LJ.
My Lords, I
would have hesitated long before overruling such a long and consistent line of
authorities if I thought that people had arranged their affairs and dealt with
their property on the basis that those authorities correctly stated what is the
existing law; but when honest parties to a contract for the sale of land or an
option to enter into such a contract have in the past inserted provisions for
the ascertainment of the purchase price similar to the italicised words
included in the option clause in the instant case they must have intended to
create legal rights to have those provisions acted on by both parties and not
flouted by either party at his own sweet will; otherwise there is no point in
inserting them at all. So, to overrule the old authorities will be to give
effect to the intentions of those who have made use of such provisions in
contracts that have been entered into before the decision of this House in the
instant appeal.
For these
reasons and those given by Lord Fraser of Tullybelton I would allow the appeal
and make the following order:
DECLARE that
upon the true construction of each of the four leases in the statement of claim
mentioned the clauses therein respectively contained confer on the plaintiff
valid options to purchase the reversions in fee simple in the premises thereby
respectively demised.
AND DECLARE
that upon the true construction thereof and in the events which have happened
the options respectively contained in the three of such leases defined in the
statement of claim as the 1955 lease the 1966 lease and the 1968 lease have
been validly and effectively exercised.
ORDER that
the contracts constituted by the exercise of the options respectively contained
in the said three leases be specifically performed and carried into execution
in accordance with the conditions contained in the respective clauses of such
leases.
AND ORDER
that the following Inquiries shall be made, that is to say:–
1. AN INQUIRY
what is the fair valuation of each of the reversions in fee simple in the
premises respectively demised by the said three leases, the amount of such
valuation in each case to be certified.
2. AN INQUIRY
whether a good title can be made to each of such reversions.
AND IN CASE
it shall appear that a good title can be made to each of the said reversions
ORDER that the plaintiff be at liberty to prepare proper conveyances (to be
settled by the court in case the parties differ) to itself of such reversions
in consideration of the following sums respectively, that is to say:–
(a) In the case of the 1955 lease the fair
valuation of the reversion in the premises thereby demised certified as
aforesaid or the sum of £12,000, whichever be the greater.
(b) In the case of the 1966 lease the fair
valuation of the reversion in the premises thereby demised certified as
aforesaid.
(c) In the case of the 1968 lease the fair
valuation of the reversion in the premises thereby demised certified as
aforesaid or the sum of £21,500, whichever be the greater.
AND ORDER
that the first and second defendants do execute the said Conveyances in respect
of the reversions in the premises comprised in the 1955 lease and the 1966
lease and that the first and third defendants do execute the said conveyance in
respect of the reversion in the premises comprised in the 1968 lease.
AND ORDER
that the plaintiff’s costs in the courts below be taxed by the taxing master
and their costs in this House be taxed by the Clerk of the Parliaments and that
the said costs when taxed be deducted from the amount of the said purchase
moneys when computed as aforesaid provided that such costs to be deducted as
aforesaid shall be limited to the plaintiff’s costs in this House and the Court
of Appeal and one-half of their costs of the action down to and including the
judgment of Lawson J.
AND UPON the
plaintiff paying to the defendants at a time and place to be fixed by the Court
the balance of the amount of such purchase moneys after such deduction as
aforesaid ORDER that the defendants do deliver to the plaintiff the three said
conveyances together with all deeds and writings in their possession dealing
solely with the said premises and giving an acknowledgment of the right of the
plaintiff to production and delivery of copies of and undertaking for the safe
custody of deeds relating also to other property as provided by section 64 of
the Law of Property Act 1925.
AND THE
PARTIES are to be at LIBERTY TO APPLY to the High Court.
In his speech
agreeing that the appeal should be allowed, LORD FRASER OF TULLYBELTON said:
The appellants are the tenants in four leases, by each of which they were
granted an option to purchase the freehold reversion of the leased premises at
a valuation. The appellants have exercised the options, but the respondents,
who are the landlords, contend that the options are unenforceable. The
questions now to be determined, therefore, are whether the options are valid
and enforceable, and, if so, how they should be enforced.
The leases
relate to adjacent industrial premises in Gloucester. They were granted at
different dates, but for terms which all expire on December 24 1997, at yearly
rents which are subject to periodical review. The leases are all in
substantially the same form. For reasons that are not now material the option
contained in the earliest lease, that dated March 23 1949, had not been
exercised when the writs in these proceedings were issued, but it has been
subsequently exercised and there is now no relevant distinction between that
option and the other three. The clause in the 1949 lease, clause II, has been
taken as typical of them all. It entitled the appellants to purchase the
reversion in fee simple, upon certain conditions which were all satisfied, ‘at
such price not being less than £75,000 as may be agreed upon by two valuers one
to be nominated by the lessor and the other by the lessee or in default of such
agreement by an umpire appointed by the said valuers . . .’. The respondents
contend that the options are void for uncertainty on the ground that they
contain no formula by which the price can be fixed in the event of no agreement
being reached, and that they are no more than agreements to agree. The
respondents have therefore declined to appoint their valuer. The machinery
provided in the leases has accordingly become inoperable.
In these
proceedings the appellants seek a declaration that the options are valid, that
they have been validly and effectively exercised, and that the contracts
constituted by the exercise ought to be specifically performed. As regards the
mode of performance, the main argument for the appellants is that the court
should order such inquiries as are necessary to ascertain the value of each of
the properties. Lawson J decided the question of principle in favour of the
appellants, but his decision was reversed by the Court of Appeal, which held
that the options were unenforceable. Templeman LJ, who delivered the judgment
of the Court of Appeal, made a full review of the English authorities, and the
conclusion which he drew from them was, in my opinion inevitably, adverse to
the appellants’ contentions. The fundamental proposition upon which he relied
was, in his own words, ‘. . . that where the agreement on the face of it is incomplete
until something else has been done, whether by further agreement between the
parties or by the decision of an arbitrator or valuer, the court is powerless,
because there is no complete agreement to enforce’. I agree that that is the
effect of the earlier decisions but, with the greatest respect, I am of opinion
that it is wrong. It appears to me that, on the exercise of the option, the
necessary preconditions having been satisfied, as they were in this case, a
complete contract of sale and purchase of the freehold reversion was
constituted. The price, which was of course an essential term of the contract,
was, for reasons which I shall explain, capable of being ascertained and was
therefore certain. Certum est quod certum reddi potest — see Foley
v Classique Coaches Ltd [1934] 2 KB 17, 21 per Viscount Dunedin.
The courts
have applied clauses such as those in the present case in a strictly literal
way and have treated them as making the completion of a contract of sale
conditional upon agreement between the valuers either on the value of the
property or, failing that, on the choice of an umpire. They have further laid
down the principle that where parties have agreed on a particular method of
ascertaining the price, and that method has for any reason proved ineffective,
the court will neither grant an order for specific performance to compel
parties to operate the agreed machinery nor substitute its own machinery to
ascertain the price, because either of these clauses would be to impose upon
parties an agreement that they had not made.
That was
decided by Sir William Grant MR in Milnes v Gery (1807) 14 Ves Jr
400 and his decision has been accepted ever since. The basis of his decision is
sufficiently explained by the following sentences from his opinion at p 406:
The only
agreement, into which the defendant entered, was to purchase at a price, to be
ascertained in a specified mode. No price having ever been fixed in that mode,
the parties have not agreed upon any price. Where then is the complete and
concluded contract which this court is called upon to exercise?
At p 409:
In this case
the plaintiff seeks to compel the defendant to take this estate at such price
as a Master of this court shall find it to be worth; admitting, that the
defendant never made that agreement; and my opinion is that the agreement he
has made is not substantially, or in any fair sense, the same with that; and it
could only be by an arbitrary discretion that the court could substitute the
one in the place of the other.
That view had
not always been followed in previous cases in England — see Hall v Warren
(1804) 9 Ves Jr 605 where the seller had become insane and could not name his
valuer, but Sir William Grant MR held that a mode of ascertaining the value
‘equivalent, and as effectual and fair’ as that which had been agreed on might
be found. In Roman law there had been doubt about the position when a sale was
made at a price to be fixed by a third party, until Justinian laid down that
the contract became complete only when the third party had fixed the price — (Institutes
3 23 1), but that rule was not followed by the Scottish court in Earl of
Selkirk v Nasmith (1778) Mor 627.
So far as
England is concerned, the decision in Milnes v Gery, supra,
seems to have been treated as settling the law on this point, and in Agar
v Macklew (1825) 2 Sim & St 418 the Vice-Chancellor (Sir John Leach)
said at p 423:
I consider it
to be quite settled that this court will not entertain a Bill for the specific
performance of an agreement to refer to arbitration; nor will, in such case,
substitute the Master for the arbitrators, which would be to bind the parties
contrary to their agreement.
Although the
Vice-Chancellor referred to ‘arbitrators’, their function was to act as what
would now be called valuers. The rule being settled, it is unnecessary for me
to refer to later decisions when it has been applied.
While that is
the general principle it is equally well established that, where parties have
agreed to sell ‘at a fair valuation’ or ‘at a reasonable price’ or according to
some similar formula, without specifying any machinery for ascertaining the
price, the position is different. As the Master of the Rolls said in Milnes
v Gery, supra at p 407:
In that case
no particular means of ascertaining the value are pointed out: there is nothing
therefore precluding the court from adopting any means adapted to that purpose.
The court will
order such inquiries as may be necessary to ascertain the fair price — see Talbot
v Talbot [1968] Ch1.
I recognise
the logic of the reasoning which has led to the courts’ refusing to substitute
their own machinery for the machinery which has been agreed upon by the parties.
But the result to which it leads is so remote from that which parties normally
intend and expect, and is so inconvenient in practice, that there must in my
opinion be some defect in the reasoning. I think the defect lies in construing
the provisions for the mode of ascertaining the value as an essential part of
the agreement. That may have been perfectly true early in the 19th century,
when the valuer’s profession and the rules of valuation were less well
established than they are now. But at the present day these provisions are only
subsidiary to the main purpose of the agreement, which is for sale and purchase
of the property at a fair or reasonable value. In the ordinary case parties do
not make any substantial distinction between an agreement to sell at a fair
value, without specifying the mode of ascertaining the value, and an agreement
to sell at a value to be ascertained by valuers appointed in the way provided
in these leases. The true distinction is between those cases where the mode of
ascertaining the price is an essential term of the contract, and those cases
where the mode of ascertainment, though indicated in the contract, is
subsidiary and non-essential — see Fry on Specific Performance (6th ed)
paras 360, 364. The present case falls, in my opinion, into the latter
category. Accordingly, when the option was exercised there was constituted a
complete contract for sale, and the clause should be construed as meaning that
the price was to be a fair price. On the other hand, where an agreement is made
to sell at a price to be fixed by a valuer who is named, or who, by reason of
holding some office such as auditor of a company whose shares are to be valued,
will have special knowledge relevant to the question of value, the prescribed
mode may well be regarded as essential. Where, as here, the machinery consists
of valuers and an umpire, none of whom is named or identified, it is in my
opinion unrealistic to regard it as an essential term. If it breaks down there
is no reason why the court should not substitute other machinery to carry out
the main purpose of ascertaining the price in order that the agreement may be
carried out.
In the present
case the machinery provided for in the clause has broken down because the
respondents have declined to appoint their valuer. In that sense the breakdown
has been caused by their fault, in failing to implement an implied obligation
to co-operate in making the machinery work. The case might be distinguishable
in that respect from cases where the breakdown has occurred for some cause
outside the control of either party, such as the death of an umpire, or his
failure to complete the valuation by a stipulated date. But I do not rely on
any such distinction. I prefer to rest my decision on the general principle
that, where the machinery is not essential, if it breaks down for any reason
the court will substitute its own machinery.
The question
has apparently never been considered by your Lordships’ House, but it has been
regarded as settled at least since the case of Agar, supra (1825)
in England and also in other countries whose law is based upon English law,
including Australia, New Zealand, Canada and some of the states in the United
States of America. In these circumstances I would not have felt it right to
depart from the rule which has been so long and so widely accepted were it not
that, in addition to my clear opinion that the existing rule is not appropriate
in present-day conditions, there are other considerations tending to justify a
departure from precedent. These are as follows:
1. The rule
established by Milnes and Agar, supra has not been
extended, but has been to some extent whittled away by exceptions. One of these
exceptions is where an agreement has been partly performed. It was expressed by
Templeman LJ in the Court of Appeal in the following words which I gratefully
adopt:
Where an
agreement which would otherwise be unenforceable for want of certainty or
finality in an essential stipulation has been partly performed so that the
intervention of the court is necessary in aid of a grant that has already taken
effect, the court will strain to the utmost to supply the want of certainty
even to the extent of providing a substitute machinery.
An example was Gregory
v Mighell (1811) 18 Ves Jr 328, where a tenant had been in possession of
premises for 11 years under a lease which provided for a fair rent to be fixed
by two valuers or their umpire, but no rent had been fixed in that way. The
tenant admitted that some rent must be due and the court ordered that it should
be fixed by the Master. The recent case of Beer v Bowden
(unreported, 1976) is another example of the exception. No doubt these were
stronger cases than the present to justify intervention by the court, but the
present case is not entirely outside the exception because the option is one
term of the lease which has been in force for some years. When the option is
exercised in accordance with clause 11, the resulting agreement is not entirely
separate from the partly performed contract of lease.
2. A second
exception applies where the valuation provisions relate to a subsidiary part of
a wider contract, which is itself valid and enforceable. The court will take
steps to prevent the wider contract being rendered unenforceable by a failure
of the machinery for the subsidiary valuation. Thus in Smith v Peters
(1875) LR 20 Eq 511 there was an agreement for sale of the lease of a public
house at a fixed price and of the household furniture, fixtures and other
effects at a fair valuation to be made by a named valuer. The seller obstructed
the valuer in the performance of his duty. Sir G Jessel MR said that ‘there is
no evidence that the value of the fixtures and furniture was so large or to be
an essential portion of the contract’ and he decreed specific performance and
made a mandatory order compelling the vendor to permit the valuer to enter the
premises for the purpose of valuing the fixtures and furniture. Similarly in Richardson
v Smith (1870) LR 5 Ch 648, a contract for the sale of a valuable estate
included an agreement that certain furniture and other articles of much less
value should be taken by the purchaser at a valuation to be made by valuers
mutually agreed upon. The vendor refused to appoint a valuer and refused to
complete any part of the contract. The court made an order for specific
performance of the contract except for the part relating to the furniture and
other articles which was severed. Lord Hatherley LC said at p 651:
In this case
an attempt is made to push the doctrine of Milnes v Gery, which
has already been certainly carried quite far enough, to an extent which would
be utterly unwarrantable, and which, if it were permitted, would induce vendors
who are desirous of retaining the power of escaping from their contracts to
introduce provisions for the valuation of some minor part of the subject matter
of the contract in such a mode that they might at any time
contract simply by setting up an act of their own in wrong of the purchaser,
and refusing to appoint a valuer. . . . Then could either the purchaser or the
seller play fast and loose as long as he pleased with the agreement and get off
the bargain by not naming a valuer?
These
observations are applicable in principle to a case where the mode of valuation
specified in the contract is not essential to the main purpose of the contract.
The case of Dinham
v Bradford (1869) LR 5 Ch 519 partakes of both the exceptions to which I
have referred. In that case a partnership agreement provided that, on
dissolution of the partnership, one partner should purchase the interest of the
other at a valuation to be made by two valuers, one appointed by each partner,
but no provision was made to appoint an umpire. It was held that the court
would carry the partnership agreement into effect by ascertaining the value of
the share. Lord Hatherley LC said at p 523:
If the
valuation cannot be made modo et forma, the court will substitute itself
for the arbitrators. It is not the very essence and substance of the contract,
so that no contract can be made out except through the medium of the
arbitrators. Here the property has been had and enjoyed, and the only question
now is, what is right and proper to be done with regard to settling the price?
Similarly here
the mode of valuation provided for is not the very essence and substance of the
contract.
3. Departure
from precedent on the question raised in this appeal is not likely to create a
‘danger of disturbing retrospectively the basis on which contracts, settlements
of property and fiscal arrangements have been entered into’, to borrow the
language of the practice direction explaining the condition on which your
Lordships’ House would not regard itself as bound by its own previous
decisions. I do not believe that honest persons are in the habit of making
agreements containing option clauses in terms such as those now under
consideration, on the basis and with the intention that the option will be
unenforceable. On the contrary. I think they would generally be astonished to
be told that the exercise of the option had not brought about a complete
contract.
The
appropriate means for the court to enforce the present agreements is in my
opinion by ordering an inquiry into the fair value of the reversions. That was
the method used in Talbot v Talbot, supra. The alternative
of ordering the respondents to appoint a valuer would not be suitable because in
the event of the order not being obeyed, the only sanction would be
imprisonment for contempt of court, which would clearly be inappropriate.
For these
reasons the decisions in Agar v Macklew, supra and Vickers
v Vickers (1867) LR 4 Eq 529 should in my opinion be overruled. I agree
with the order proposed by my noble and learned friend Lord Diplock allowing
this appeal.
In a speech
dissenting from the majority and in favour of dismissing the appeal, LORD
RUSSELL OF KILLOWEN said: It appears to be generally accepted that the law as
previously understood since at least the early 19th century is in favour of the
respondents and of the decision of the Court of Appeal. It is proposed by the
majority of your Lordships to assert that that previous understanding was
erroneous. I cannot agree.
Basically the
assumption is made that the parties intended that the exercise of the option
should involve payment of a ‘fair price’ or a ‘fair value’. Of course parties
to such a contract could in terms so agree, and I am not concerned to deny that
in such a case a court could enforce the contract by ascertainment of a fair
price or fair value, treating specific provisions in the contract for methods
(which proved to be unworkable) of ascertaining that fair price or valuation as
being inessential. But that is not this case. Why should it be thought that
potential vendor and purchaser intended the price to be ‘fair’? The former would intend the price to be high,
even though ‘unfairly’ so. And the latter vice versa. Vendors and purchasers
are normally greedy.
If the theory
that the contract can be construed as if it were a contract in terms for
ultimate sale and purchase at a fair price or value is wrong, specific
performance cannot be ordered, on well-established principles. Assuming refusal
by the vendor to appoint a valuer to be a breach of contract, damages cannot be
other than nominal: and I do not understand it to be suggested that the court
can nominate a person as ‘vendor’s valuer’, nor order nomination of a valuer by
the vendors on pain of contempt of court should the order not be obeyed.
In my opinion
this case is an example of the long-established and quite sound principle that
if A agrees to sell Blackacre to B the contract must provide for the price to
be paid either in express terms or by the establishment of agreed machinery which
is bound to work by which the price can be ascertained. If the machinery is
not so bound to work the party taking ultimate advantage of its deficiencies is
not to be castigated as having taken some unfair advantage, as though he had
from the outset plotted to do so. If the tackle is not in order from the start
it cannot be assumed that either party then knew it.
I do not
propose to examine the relevant authorities stretching through generations of
distinguished judges in this field. They have been fully discussed in the
judgment of the Court of Appeal (Templeman LJ). It will have been noted that
the strength of the main stream of authority is accentuated by the exceptions
diverted from it: for example, if there is undoubtedly a tenancy the court must
fix a proper rent or if a sale of Blackacre involves chattels or stock at a
valuation the court will in one form or another ensure that the main object
(the sale of Blackacre at a stated price) is not stultified by a sidewind
problem of valuation. But the main stream has flowed on: and I know of no
adequate reason in 1982 for damming it. Indeed I mistrust profoundly the
possible flooding.
I felt
considerable sympathy for counsel for the respondents when he was told that he
had all the law on his side, but was (in effect) facing the prophets. (This is
a paraphrase of my own remark in argument, when he was told that he had all
Equity behind him and I intervened to suggest that he had less in front of him.)
In the result
I would dismiss this appeal. I can only exclaim with Macduff — ‘What! All my
pretty chickens and their dam at one fell swoop?’
In a speech
agreeing that the appeal should be allowed, LORD SCARMAN said: I would allow
the appeal. I agree with the speeches delivered by my noble and learned
friends, Lord Diplock and Lord Fraser of Tullybelton, and with the order
proposed by them. I add a few observations only because we are departing from a
rule which has been accepted as good law for more than 150 years.
The question
for decision is as to the true construction to be placed upon an option granted
to a lessee to buy the freehold reversion. The terms of the option have been
set out in full by my noble and learned friend, Lord Diplock. Were the parties
agreeing to a sale ‘at a fair valuation’, ie ‘at a reasonable price’? Or were they treating their chosen mode of
ascertaining the price as being of the essence of their contract? What was the object of their contract? A fair and reasonable price? Or a price reached only by the means
specified?
Unembarrassed
by authority, I would unhesitatingly conclude that the parties intended that
the lessee should pay a fair and reasonable price to be determined as at the
date when he exercised the option. The valuation formula was introduced into
the contract merely as a convenient way of ascertaining the price at that
future time. Should we be deterred from so construing the provision by the
existence of a line of authority stretching back over 150 years in which
provisions remitting to a valuer or arbitrator the ascertainment of a price
have been construed as making the machinery of ascertainment an essential term
of the contract?
I think not.
Indeed I challenge the relevance of ancient authority when construing the terms
of the formula used in these leases. I agree with the comments of my noble and
learned friends on the injustice which can arise by applying old cases when
what has to be construed is a modern contract.
In my view, no
‘judicial valour’ (a quality greatly admired by Sir Frederick Pollock) is
needed to overrule a line of authority which never reached this House and
which, properly considered, is concerned not so much with principle as with
construction. We would be doing a public disservice if, in deference to ancient
law, we were to invalidate a simple, sensible, and practical formula for
ascertaining a fair and reasonable price. In today’s conditions a valuation by
professional valuers achieves exactly that.
Also agreeing
that the appeal should be allowed, LORD BRIDGE OF HARWICH said: Your Lordships
are invited to overrule a line of authority originating with the decision of
Sir William Grant MR in Milnes v Gery (1807) 14 Ves Jr 400 and
continuing unbroken ever since. The principal decisions and their effect are
comprehensively and accurately reviewed in the unanimous judgment of the Court
of Appeal, who rightly regarded themselves as bound to decide against the
appellants. Your Lordships are not so bound, and being
compelling reasons why the principles laid down by the line of authority in
question should no longer be regarded as good law, I had intended to write a
speech attempting to express those reasons in my own words.
I have now had
the advantage of reading in draft the speeches of my noble and learned friends
Lord Diplock, Lord Fraser of Tullybelton and Lord Scarman, and finding in them
the grounds for allowing this appeal so fully, so clearly and so convincingly
expressed, I am satisfied that anything I might add would be mere repetition.
For the reasons given in those speeches I, too, would allow the appeal and I
concur in the order proposed by Lord Diplock.
An order was
made in the form proposed by Lord Diplock at the end of his speech.
