Contract – Repudiation – Quantum meruit – Parties agreeing to collaborate to achieve joint venture with development company for development of new student accommodation – Parties setting up partnership for that purpose – Parties each to have one-third share in partnership and its profits – Joint venture set up by which partnership having 50% share in development company – One party withdrawing from joint venture and alleging repudiatory breach of contract by the other parties – Whether that party having arguable claim for entitlement to quantum meruit for performance so far
In 2009, the claimant entered into an agreement with the two defendants to collaborate on an investment in new student accommodation in the United Kingdom by a joint venture with a development company that was already involved in that area. By the terms of that agreement, the claimant undertook to negotiate the best possible deal with the development company and to do whatever was needed to enable the joint venture to go ahead. The parties formed a limited liability partnership in which each had a one-third interest and the profits of which were to be divided equally between the three. The claimant was also to receive an unspecified priority payment for his active role in overseeing the interests of the partnership and the investors. He agreed to work at his own risk to establish the business in return for his one-third share and his priority payment if and when the joint venture was established.
The joint venture was subsequently implemented, with the partnership acquiring a direct 50% equity interest in the development company at a nominal cost. However, by November 2009, the claimant had serious concerns about the development company. He withdrew from the joint venture and requested that all references to him be removed from the documentation.
The claimant brought a claim against the defendants for a quantum meruit payment for his work to date. He submitted that a partnership at will had been created, giving rise to an implied obligation of good faith, and that, having terminated the agreement on the grounds of the defendants’ breach of that obligation, he was entitled to recover the market value of the services that he had provided to the defendants and from which they had benefited. He claimed entitlement to a one-third share in the partnership’s 50% interest in the development company or, alternatively, compensation for 471 hours of work.
A master made an order giving leave to serve the proceedings on the defendants out of the jurisdiction in the United States. The defendants applied to set that order aside.
Held: The application was allowed. Where an agreement is terminated prematurely for repudiatory breach by one party, the other party may, instead of suing for damages, elect to recover the value of its performance to date by way of quantum meruit. However, that rule is addressed solely to a situation in which, as a result of the wrongful termination or repudiation of the agreement, one party has failed to complete his contractual performance and has not, in consequence, reached a point where counter-performance by the other party has become due. The rule does not apply where the first party has performed and therefore has an entitlement under the contract to payment or a remedy in damages, or where he has not only performed but had also received the bargained-for counter-performance. The form of the joint venture envisaged by the parties to the agreement was that the partnership would take a 50% nominee shareholding in the development company as nominee for each of the three parties in equal shares. The joint venture had been established in the agreed form but the claimant had then withdrawn from the joint venture, thereby renouncing the benefit that he had received, and been entitled to receive, in return for his services in negotiating and bringing into being the joint venture. The agreement had been fully consummated and performed when that joint venture came into being; therefore, the claimant was not entitled to a quantum meruit. The claim had no reasonable prospect of success and the permission to serve out of the jurisdiction was set aside accordingly.
Per curiam: The rule that an innocent contractor is entitled to a quantum merit for his part performance following termination of a contract for repudiatory breach is conceptually unsound and can have unattractive consequences. However, since it is supported by a significant, if mainly elderly, body of case law, its rejection would require a decision at a much higher level in the judicial hierarchy, and after greater and more intense adversarial debate, that had occurred in the instant case.
This was the hearing of an application by the defendants, Amnon Bar-Tur and Armon Bar-Tur, to set aside a decision of Master Price granting leave to the claimant, Thomas Elek, to serve proceedings out of the jurisdiction on a claim for a quantum merit for part performance of a contract following its termination on the grounds of repudiary breach.
Robert Deacon (instructed by CKFT) appeared for the claimant; John Wardell QC (instructed by Davenport Lyons) represented the defendants.
Giving judgment, Mr David Donaldson QC said:
1. I have before me an application by the defendants to set aside an order made ex parte by Master Price on 4 April 2012 granting permission to the claimant to serve the present proceedings out of the jurisdiction in the United States of America on both defendants.
2. The claimant is a solicitor, for many years non-practising, and business-man and represents himself in these proceedings. He became acquainted with the First defendant in 2008 in a matter unrelated to the subject-matter of the present claim, and they discussed the possibility of future collaboration. Shortly thereafter the claimant and the first defendant became aware of an opportunity to invest in the development of student accommodation in the United Kingdom, and on discussion with the first defendant they agreed that it was one in which they could work together. On 9 June 2009 the claimant and the first defendant met with the directors and shareholders of Alumno Developments Ltd (“ADL”), a company already operating in this area, with a view to forming a joint venture with it. The first defendant wished also to involve his son, the second defendant, and it was agreed that the three of them would collaborate. On 26 June 2009, a letter of intent with ADL was signed by Safeharbor Capital Partners LLP, as nominee for the three men. (For the purposes of this judgment it is not necessary to make any distinction between Safeharbor and the similarly named US corporate entity, Safeharbor Capital Partners LLC, and for simplicity I refer to them indiscriminately as “Safeharbor”.)
3. On 29 June 2009 the claimant wrote to the first defendant to confirm:
“our agreement to collaborate in establishing a joint venture with a UK development company to invest in and to develop a portfolio of properties to provide student accommodation in the UK”.
The letter was countersigned as agreed by the first defendant. In summary:
a. The interests of the three men would be held through Safeharbor in which each of them would have a one third interest.
b. On each project Safeharbor and the outside investors it intended to attract for the projects would receive a preferential payment of 18% of any profit plus 70% of the balance of such profit, which would be split between Safeharbor and the investors 30/70. Safeharbor would also charge its investors a management fee of up to 1.5% of funds invested.
c. The profits of Safeharbor would be divisible equally between the three men. The claimant would also receive an as yet unspecified priority payment to compensate him for his active role in overseeing the interests of Safeharbor and the investors.
d. The claimant would continue to negotiate the best possible deal for Safeharbor with ADL and to do whatever needed to be done to enable the joint venture to go ahead.
The agreement did not provide for any payment to the claimant for his role in negotiating the deal with ADL and in his Particulars of Claim the claimant expressly stated that he had agreed to work “at his own risk” to establish the business in return for the one-third share and his priority payment if and when the joint venture was established.
4. Thereafter the claimant worked to achieve this result. The formal structure of the joint venture was however altered in that the three men would through Safeharbor acquire a direct 50% equity interest in ADL at a nominal cost, as recorded in a letter agreement dated 5 October 2009, and, as the claimant confirmed to me at the hearing, this was implemented shortly thereafter, probably on 18 October 2009 when there was a meeting of the board of ADL. In this slightly altered form the joint venture in the letter of 29 June came into being.
5. The first project related to a development in Telford, Bristol. At the end of October 2009, according to the claimant, he notified the defendants of an issue in relation to that project which created serious concerns for him about the honesty and integrity of the ADL management. The first defendant told him that he was not willing to rock the boat by seeking clarification of the matter from them.
6. On 4 November 2009 the claimant emailed the first defendant in advance of a meeting with ADL the next day, saying that he had no idea what ADL’s management was proposing to its contractual partners and complaining that his calls and emails were not being answered. He ended:
“Whilst you may have a good feeling following your conversation with David and Mevan [ADL management] I continue to have a very bad feeling. I need to have confidence in Alumno’s management to be able to work with them and right now I absolutely do not.
Let us talk as I am having serious doubts about whether I want to continue.”
The ensuing talk did not resolve matters. The claimant, according to his evidence, repeated his concerns and told the first defendant that he would be placed in a very difficult position if they were not addressed, but the first defendant remained unwilling to rock the boat. The next day the claimant sent a further email in which he stated that,
“I have reached the conclusion that I wish to terminate my involvement with Safeharbor and Alumno with immediate effect”
and asked the first defendant to inform the second defendant and ADL management of his decision and to “arrange to have all references to me removed from the documentation”.
7. In the following weeks there were discussions in which the defendants raised the possibility that the claimant might continue as an advisor. This was not satisfactory to the claimant, though he was prepared to consider returning if the concerns which had led him to terminate his involvement could be resolved. As a temporary measure, and at the request of the defendants, the claimant drafted a shareholders’ agreement, which took him some 15 hours. The discussions came to nothing. The two defendants were not prepared to restore any equity participation in ADL to the claimant. The claimant said that there was a partnership between him and the two defendants and required them to buy out his partnership interest, in default of which, as he said in a letter of 25 February 2010 he would serve formal notice to dissolve the partnership and, if necessary, ask the court to appoint a receiver under the Partnership Act 1890, to wind it up and realise its assets. In the event, no such steps were taken and no such proceedings have been commenced.
8. The only cause of action advanced by the claimant in these proceedings, and the sole basis on which permission to serve out of the jurisdiction was sought and obtained, is quantum meruit. In essence he says that the agreement of 29 June 2009 created a partnership at will, giving rise to an implied obligation of good faith, and that having terminated the agreement for breach by the defendants of that obligation, he was entitled to recover as a quantum meruit the market value of the services which he had provided to the defendants and from which they had benefited. All the work which he had carried out to achieve the joint venture with ADL had been provided “on a speculative basis”, so that the claimant had accepted that if unsuccessful he was not entitled to any reward. The defendants had as a result of his efforts acquired at nominal cost their share in ADL from which they were, according to the claimant, likely to benefit by several million pounds over the next 10 years, and they had been unjustly enriched to the extent of a one-third share in ADL and its profits (this appears to be a misstatement for a one-third share in the 50% interest in ADL). On this basis he seeks an order for a transfer to him of a one-third share in ADL (again probably misstated) or compensation for 471 hours of work done by him.
9. It is to be noted that the claimant does not seek any order for the distribution of partnership assets. Nor does he seek damages for wrongful termination or repudiation of the agreement between the parties, consistently with his pleading that the agreement created a partnership at will.
10. In support of his case that the permission to serve out of the jurisdiction should be maintained the claimant relies on the two gateways listed in CPR PDB at para 3.1(6) and (16), namely (a) a claim made in respect of a contract made within the jurisdiction or governed by English law, and (b) a claim for restitution arising out of acts committed within the jurisdiction. It is clear, and I believe common ground, that if the cause of action advanced by the claimant is viable as a matter of law and satisfies the merits test of good arguable case (see Seconsar Far East Ltd v Bank Markazi [1994] 1 AC 438), at least the second and perhaps both of these gateways will be satisfied. “Good arguable case” equates to “reasonable prospect of success” (see eg BAS Capital Funding Corp v Medfinco Ltd [2004] 1 Lloyds Rep 652).
11. In essence, the claimant contends that when an agreement is terminated prematurely for repudiatory breach by one party the other party can instead of suing for damages elect to recover by way of quantum meruit the value of its performance to date. In support of this proposition the Claimant drew my attention to a decision of the Supreme Court of Victoria Court of Appeal in Sopov v Kane Constructions Pty Ltd (No.2) [2009] VSCA 141 (CA (Vic). That Court laid out a considerable case for the rejection of such a rule. In particular, it appeared to rest on the now heretical view that termination for repudiatory breach amounted to a complete rescission of the contract, leaving the claimant free to recover on the basis simply that it had provided its services at the request of the defendant. That meant also that the Claimant could recover even where, if the contract had been completed, it would have proved loss-making. However, despite its strongly expressed reservations, the court in Sopov took the view that the availability of this cause of action had been clearly established for over a century in Australia and could not now be questioned. At the hearing I was not referred to any English authority, and asked counsel if this could be researched further and the results communicated to me. In response I was, after the hearing, provided with many lever arch files of decided authority, mostly from Australia and New Zealand, for which—despite a substantial degree of possible “overkill”—I express my thanks.
12. In the light of what I have to say below, I do not propose to burden this judgment with a survey and discussion of this material, and would refer those who wish to explore it in more depth to a helpful article by Julian Bailey in Const. L.J. 2006, 217–240. In short, as the author rightly observes, the proposition that following termination for repudiatory breach an innocent contractor is entitled in lieu of damages to recover a quantum meruit for his part performance can claim the support of a significant, if mainly elderly, body of English case law: see in particular Planché v Colburn (1831) 5 Car. & P. 57; De Bernardy v Harding, (1853) 8 Exch. 822; Lodder v Slowey [1904] AC 442 (P.C.); Lusty v Finsbury Securities Ltd (1991) 58 B.L.R. 66. Critics suggest that Ranger v Great Western Railway Co (1854) 5 HLC 72 is high-level authority to the contrary. My own conclusion is that, though, like the court in Sopov v Kane, I regard the rule as conceptually unsound and fertile with unattractive consequences, doctrinal purity and logic does not always win out in the common law, and if it is now to be rejected, that will have to occur at a much higher level in the judicial hierarchy than I occupy and after greater and more intense adversarial debate than I have enjoyed.
13. It is however important to observe the limits of the rule. It addresses solely a situation in which as a result of the wrongful termination or repudiation of the agreement the claimant has failed to complete his contractual performance and has in consequence not reached a point where counter-performance by the defendant has become due. It does not apply where the claimant has performed and has in consequence an entitlement under the contract to payment or a remedy in damages. In this I agree entirely with Cooke J in Taylor v Motability Finance Ltd [2004] EWHC 2619 (Comm).
14. Still less can the rule apply where the claimant has not only performed but has actually received the counter-performance. In the present case, the claimant provided his services on the basis that he would receive no compensation if the joint venture with ADL did not materialise as a result of these efforts. After the letter agreement of 5 October 2009 the form of the joint venture envisaged by the parties was Safeharbor taking a 50% nominee shareholding in ADL as nominee for each of the three parties in equal shares. In this revised form the joint venture was established shortly thereafter.
15. The claimant, however, then withdrew from the joint venture, and thus renounced the benefit which he had received and been entitled to receive in return for his services in negotiating and bringing into being the joint venture with ADL. It may be open to argument (though I express no view on the point) that the conduct of the defendants and possibly of the other shareholders in ADL was a breach and even a repudiatory breach of the joint venture agreement. But no claim is made for damages for any such repudiation. And it was not a breach of the agreement with the defendants of June 2009, as amended in October 2009, which had been fully consummated and performed when the joint venture came into being.
16. Finally, if, as is the claimant’s own case, that agreement created only a partnership at will, the notion of premature termination by the accepted repudiation of future obligations can have no basis in the present case. A claim for quantum meruit in lieu of damages for repudiation is necessarily equally devoid of foundation. I stress, however, that this is unnecessary for my decision, and that even if the claimant’s characterisation of the agreement were incorrect, the claim is otherwise vitiated for the reasons I have sought to explain in the preceding paragraphs of this judgment.
17. I should perhaps also record that though the 15 hours of work in November 2009 to which I referred in para 7 were included in the claim for a quantum meruit based on the termination of the agreement, no separate and alternative claim was made in respect of this work on the basis that it was done pursuant to a specific subsequent request of the defendants. Had any such claim been made, it would moreover have been for at most only a few thousand pounds, the tiniest of small change in the context of this litigation, and would, I suspect, have been paid or compromised long before the commencement of these proceedings.
18. I therefore conclude that the claim has no reasonable prospect of success and accordingly the permission to serve the proceedings out of the jurisdiction will be set aside.
Application allowed.
