Contract – Repudiatory breach – Damages – Contract for construction and letting of commercial units in development – Defendant putting work on second phase of development on hold – Whether this a repudiatory breach of contract – Whether claimant entitled to recover for wasted expenditure laid out in anticipation of contract – Claim allowed in part
The defendant was a company established by a property developer and a bank for the purposes of a joint venture to carry out a commercial and residential development on a site in London SE8. The development was to comprise four blocks around a triangular piazza and was to be funded by the bank. The defendant acquired the site in 2007. In October 2008, it entered into an agreement with the claimant company concerning the completion of the development and the grant to the claimant of long leases of the commercial units in all four blocks. The agreement set target dates for the completion of the development in two phases, with a target of July 2010 for the first two blocks and February 2011 for the third and fourth blocks. The defendant 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 claimant paid a deposit of £421,309.
The funding for the second phase of the development was conditional on the defendant achieving pre-sales of at least 85 residential units. Owing to the prevailing difficulties in the financial markets, a launch event in August 2008 had resulted in only four pre-sales. In March 2009, when sufficient pre-sales had still not been achieved, the defendant decided to put work on the third and fourth blocks on hold.
In November 2009, the claimant informed the defendant that it considered the cessation of work on the third and fourth blocks 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 claimant terminated the contract. Three weeks previously, the defendant had in fact recommenced works although the claimant was unaware of this.
The claimant brought a claim for damages against the defendant. It contended that: (i) it had been induced to enter into the contract by the defendant’s fraudulent or negligent misrepresentations that funding for the development was in place or was not a matter of concern; and (ii) the defendant was in repudiatory breach of contract.
Held: The claim was allowed in part.
(1) The defendant had not misrepresented the position with regard to the financing of the development. Even if it had represented that funding was in place, that would not carry the implication that the funding had no conditions attached; most large-scale bank funding was subject to certain conditions. At the date of the agreement, the defendant had not felt that the pre-sales condition for funding on the third and fourth blocks was a cause for concern, despite the disappointing result of the launch event. It had not been negligent in that view since the extent and implications of the prevailing financial crisis had not yet become apparent at that time. The claimant’s claim in misrepresentation failed.
(2) The defendant was however liable for repudiatory breach of contract. The requirement to carry out the works with due diligence did not mean simply that the works were to be done carefully; as commonly used in construction contracts, the concept of due diligence connoted both due care and due assiduity and expedition. The deliberate cessation of all work on two of the four blocks in the development was not consonant with due diligence. The unexpected lack of funding might explain, but could not eliminate, the breach of the defendant’s contractual obligation. The defendant had also breached its obligation to use reasonable endeavours to procure completion by the target dates. It could not satisfy that requirement merely by endeavouring to secure finance for the third and fourth blocks. A “reasonable endeavours” clause as to the time of completion, when inserted into a construction contract, was designed to cover matters that directly related to the physical conduct of the works and did not extend to antecedent or extraneous matters such as having sufficient financial resources to perform the contract. The defendant had breached the reasonable endeavours clause since the reason for the delay was its deliberate decision to halt works on the third and fourth blocks.
Although the relevant contractual obligations were intermediate or innominate terms, so that the issue of repudiation depended on the nature of the breach, the defendant’s breaches had been repudiatory in the circumstances of the case. The defendant’s breach continued for so long as the works were halted. An ongoing breach that did not constitute a repudiation at the outset could acquire that character with the passage of time. Moreover, where an agreement comprised different parts or stages, a breach that went to the root of one significant stage, or substantially deprived the innocent party of the benefit of that stage, constituted a repudiatory breach even though that party had the benefit of the other stage. The agreement envisaged four blocks framing a piazza. That was an important feature for the purpose of marketing the commercial units. Moreover, the existence of outstanding building works on two of the blocks might interfere with the subletting of the completed units. It would therefore frustrate the commercial purpose of the agreement if, for a substantial period, the claimant received only two blocks while the rest of the development remained a building site. The cessation of work on the third and fourth block was so substantial as to defeat the commercial purpose of the venture. The fact that the claimant had engaged in prolonged negotiation with the defendant with a view to resolving the issue did not mean that it had subsequently affirmed the contract: Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia [1996] 2 Lloyd’s Rep 604 applied. Nor, in all the circumstances, did the defendant’s eventual recommencement of work, shortly before the claimant terminated the contract, preclude the claimant from accepting the repudiation: Stocznia Gdanska SA v Latvian Shipping Co (No 3) [2002] EWCA Civ 889; [2002] 2 Lloyd’s Rep 436 considered.
(3) The claimant was entitled to recover its deposit of £421,309. However, it was not entitled to further damages for wasted expenditure, through moneys spent in anticipation of the agreement. The valuation evidence suggested that, even if the agreement had been completed properly, the claimant would not, on letting the commercial units, have exceeded the contract rates that it had itself agreed to pay for them. Accordingly, on the balance of probabilities, the claimant would not have made a profit from the contract such as to enable it to recoup the expenditure claimed: Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm) applied.
David Mayall (instructed by WGS Solicitors) appeared for the claimant; Jonathan Gaunt QC and Adam Rosenthal (instructed by SNR Denton UK LLP) appeared for the defendant.
Sally Dobson, barrister
