Contract – Repudiatory breach – Property development – Contract for construction and letting of commercial units in development – Appellant putting work on second phase of development on hold – Whether appellant in repudiatory breach of contract – Whether respondent entitled to recover for wasted expenditure laid out in anticipation of contract – Appeal allowed
The appellant company acquired a site in London SE8 for the purpose of carrying out a substantial development comprising four blocks of commercial units and residential units arranged around a triangular piazza. In October 2008, it entered into an agreement for the grant to the respondent of 999-year leases of the commercial units for all four blocks of the completed development. The agreement set target dates for completion of the work in two phases, with a target of July 2010 for the first two blocks and February 2011 for the third and fourth blocks. The appellant was to procure that the works were carried out with due diligence and was to use reasonable endeavours to procure their completion by the target dates or as soon as reasonably possible thereafter. The respondent paid a deposit of £421,309, which was 5% of the estimated purchase price of £8,426,181.40.
In March 2009, the appellant decided to put work on the third and fourth blocks on hold owing to funding difficulties. In November 2009, the respondent informed the appellant that it considered the cessation of work to be a repudiatory breach of contract. An extended period of negotiation between the parties failed to resolve the matter and, in October 2010, the respondent terminated the contract. By that time, unknown to the respondent, the appellant had secured funding and recommenced work to the third and fourth blocks.
The respondent’s claim for damages for repudiatory breach of contract was allowed in the court below: see [2012] EWHC 1820 (Ch); [2012] PLSCS 156. The judge found that, had the respondent not terminated the contract, the third and fourth blocks would have been completed a year later than the target date. He held that the appellant’s deliberate cessation of all work on those blocks, in breach of its obligation of due diligence, was a sufficiently substantial breach as to amount to repudiation of the contract, since the agreement contemplated a single, unified development of four blocks, which were interlinked for the purpose of the respondent’s commercial marketing, and it would frustrate the commercial purpose of the agreement if, for a substantial period, the respondent received only two blocks.
Held: The appeal was allowed.
When determining whether a breach of contract by one party was of such a nature and seriousness as to justify the other party in terminating the contract, the court had to look at the position at the date of purported termination, even in a case of actual, rather than anticipatory breach. It had to take into account any steps taken by the guilty party to remedy accrued breaches of contract, as well as likely future events judged by reference to objective facts as at the date of purported termination: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 applied. In deciding whether delay justified termination of a contract, the starting point was to consider what benefit the injured party was intended to obtain from performance of the contract. It was then necessary to consider what effect the breach had had on the injured party, including: (i) what financial loss it had caused; (ii) how much of the intended benefit under the contract the injured party had already received; (iii) whether the injured party could be adequately compensated by an award of damages; (iv) whether the breach was likely to be repeated; (v) whether the guilty party would resume compliance with its obligations; and (vi) whether the breach had fundamentally changed the value of future performance of the guilty party’s outstanding obligations.
The benefit that the respondent had bargained for was, first and foremost, a leasehold interest of 999 years in four blocks, with the right, for that period, to possession of those units and exploitation of the rents and profits to be derived from them. The respondent was to take the blocks in pairs, with a gap of seven months between each handover. The appellant’s breach of contract did not have the result that the respondent could only ever acquire two out of the promised four blocks. Assuming that all four blocks were delivered one year late, the respondent would still have acquired interests in all the blocks that it contracted for. The inquiry would then centre on whether the delay had deprived it of a substantial part of the benefit of ownership of a 999-year lease in each of the four blocks. On the face of it, to deprive a party of one year out of a term of 999 years did not deprive it of a substantial part of the benefit that it was intended to receive, let alone substantially the whole of that benefit. On the judge’s findings, delay had not, of itself, caused any loss at all to the respondent. While a gap between handover of the first two blocks and the third and fourth blocks might interfere with marketing and subletting, a seven-month gap was already part of the contract. The judge had made no finding as to what difference a further gap resulting from the breach would make.
In the judge’s view, what had given the breach its repudiatory character was the uncertainty, in late 2009, that works to the third and fourth blocks would ever be restarted. However, the position had to be judged at the date when the injured party purported to terminate the contract. By that time, work on the third and fourth blocks had been restarted. The appellant had suffered no loss by reason of the delay to that date. The only future losses that it had identified were that the effective length of the 999-year term would be shorter and there would be difficulties in funding the deposit and the balance of the purchase price for longer than originally envisaged. The first of those was trivial in the context of a 999-year lease. Delay would only become a repudiatory breach if and when it was so prolonged as to frustrate the contract; the appellant’s delay was a long way from having that effect. The second of the respondent’s claimed future losses was not supported by any finding of the judge. It followed that the respondent had not repudiated the contract.
Jonathan Gaunt QC and Adam Rosenthal (ijnstructed by Dentons UKMEA LLP) appeared for the appellant; David Mayall (instructed by WGS Solicitors) appeared for the respondent.
Sally Dobson, barrister
