Settlement agreement – Repudiatory breach – Property transaction – Proceedings compromised on terms that claimants to make payment to defendants and property to be remortgaged – Defendants presenting winding-up petition against first claimant – Remortgage offer from bank withdrawn – Whether defendants in repudiatory breach of settlement agreement – Whether entitled to payment under agreement – Judgment for claimants
The first claimant company was a special purchase vehicle used by the second claimant to purchase a property in Stoke Newington, London N16, for a mixed residential and commercial development. Of the £2.144m purchase price, part came from a mortgage and £381,517 was provided by the first defendant, a solicitor who acted for the claimants on the purchase, as a loan to the first claimant. The loan was protected by restrictions on the registered title to the property, providing that no disposition of the property could be made without the written consent of the second defendant, the first defendant’s mother, and requiring the first defendant’s certification that any such consent was genuine.
Relations between the parties broke down and several sets of proceedings ensued between them. Following mediation, these were compromised by a settlement agreement on terms that, inter alia: (i) the claimants would pay £1.2m to the defendants; (ii) the defendants would deliver up the forms necessary for the removal of the restrictions; and (iii) on provision of that documentation, the claimants would remortgage the property for a maximum of £1.75m with a specified bank, on terms that would enable the defendants to make a demand for the first £300,000 of the sum owed to them in the event that the first claimant defaulted on such payment. The parties contemplated a refinancing transaction under which, in addition to the remortgage of the property, a second charge would be granted to the defendants to secure repayment of the sums due to them. However, the first defendant presented a winding-up petition against the first claimant and wrote to the bank in terms that resulted in the withdrawal of its refinance offer.
The claimants claimed damages against the defendants for repudiatory breach of the settlement agreement. A judgment given during the protracted course of the litigation held that the defendants’ entitlement to their second charge arose only as part of a simultaneous composite transaction involving the refinancing deal. The defendants none the less continued to counterclaim for £1.2m said to be owed to them under the settlement agreement.
Held: Judgment was given for the claimants.
The parties were impliedly obliged to act in good faith in respect of the performance of the settlement agreement. The parties were under mutual obligations not to deliberately undermine the settlement agreement without good cause and to co-operate in ensuring that its terms were effected.
The claimants’ obligations to pay £1.2m to the defendants under the settlement agreement had never been independent and freestanding but were linked to, and dependent on, the completion of the contemplated refinancing agreement. That matter was res judicata by reason of the earlier judgment. The undertakings given to the court by both parties clearly envisaged that the proposed refinancing would be the source of the sums payable to the defendants and the obligation to pay them depended on the completion of the refinancing transaction with the bank. The first defendant had, by her conduct, undermined or sabotaged the composite transaction with the bank in such a way as to make it impossible to perform. She had subverted the refinancing transaction by presenting the winding-up petition against the first claimant and sending the letters to the bank, acting intentionally and with full awareness of the potential consequences. Had she not done so, the composite transaction would have proceeded to completion. The first defendant’s actions were without justification and amounted to a breach of contract. Since the first defendant had always acted for and represented her mother, no distinction could be drawn between them and the breach of contract engineered by the first defendant was, in law, one for which both defendants were equally responsible. The breach was a fundamental one, which went to the root of the contract and entitled the claimants, as the innocent party, to treat the breach as repudiatory.
The general rule, on acceptance of a repudiatory breach, was that, from the time of discharge, both parties were excused from further performance of the primary obligations of the contract that each had to perform, and the party in default came under a secondary obligation, implied as a matter of law, to pay damages to the innocent party for the loss it had sustained because of the breach. The claimants’ primary obligation under the settlement agreement, which remained unperformed at the date of the termination, was the obligation to pay £1.2m to the defendants. That obligation to pay could not survive the termination of the contract, when the obligation was not freestanding but depended on the successful completion of the refinancing. Accordingly, the defendants were entitled to receive nothing. Moreover, the claimants were entitled to damages for breach of contract.
Robert Leonard (instructed by Isadore Goldman) appeared for the claimants; the defendants were not represented.
Sally Dobson, barrister
