Development agreement – Breach of contract — Change of circumstances – Parties entering into development agreement to build houses – Defendant failing to commence works since agreed minimum prices under contract unlikely to be obtained owing to recession – Judge refusing claimant summary judgment for breach of contract – Trial on liability being held — Whether defendant acting in repudiatory breach of contract — Whether defendant estopped for contending claimant in breach of contract — Issue concerning date on which agreement terminated – Claim allowed
The claimant company entered into an agreement with the defendant, whereby the latter agreed to develop the claimant’s land. The development was to include houses and flats, which the defendant would sell on long leases at minimum prices on behalf of the claimant, as freeholder, for which it would receive a share of the sales revenue.
Under the contract, the defendant was required to commence the works within 12 weeks of receiving vacant possession from the claimant and to complete them within 30 months. However, little work was done because the fall in the property market following the recession meant that the minimum prices were unlikely to be achieved and the agreement was therefore frustrated. The defendant suggested that the development should be delayed or that the minimum prices, set out in a schedule to the development agreement, and the payment terms should be reviewed. The claimant declined to review the payment terms, regarding the defendant to have breached its contractual obligations, and insisted that the breach should be remedied. The defendant took the view that the agreement was at an end and was unenforceable. The claimant purported to accept the defendant’s repudiatory breach and began proceedings for damages.
The High Court rejected the claimant’s application for summary judgment and the judge granted the defendant conditional leave to defend: see [2010] EWHC 323 (TCC); [2010] PLSCS 178. The issues for the court included: (i) whether the defendant had been in repudiatory breach of the development agreement; (ii) whether the defendant’s assertion, that the claimant had breached the obligation of good faith by, inter alia, refusing to contemplate any change to the revenue-sharing arrangements, had already been decided by the court in the application for summary judgment so that the instant court was estopped from dealing with that matter; (iii) whether the claimant’s refusal to review the minimum set prices had been a cause of the breach; and (iv) at what point had the agreement been terminated.
Held: The claim was allowed.
(1) The defendant’s breaches were repudiatory because they showed an intention no longer to be bound by the development agreement.
(2) Although the defendant had been given conditional leave to defend, the judgment was final and could give rise to a cause of action or issue estoppel. However, for such estoppel to arise, the previous court must have necessarily determined the non-existence of the cause of action which was subsequently asserted or, in the case of issue estoppel, that the same issue relevant to the second action was necessarily determined in the first action. Neither of those tests had been satisfied in respect of the defendant’s contentions regarding the claimant’s breach of good faith and it would not be an abuse of process to permit those arguments to be raised at this stage.
The obligation of good faith did not require the claimant either to agree to an adjustment of the revenue-sharing mechanism or to negotiate such an adjustment as a free-standing obligation or as part of any negotiation of the minimum prices. Although the obligation required the parties to act so that each would enjoy the anticipated benefits of the contract, it did not require either of them to give up a freely negotiated financial advantage clearly embedded in the contract. Delaying the project would defer the claimant’s profits and would mean that the land would not generate income in the meantime. A revision of the revenue-sharing agreement would result in a significant reduction in profits. It could not be said that the claimant was in breach of its obligations of good faith in refusing to accept or even negotiate on the basis of such proposals: Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch); [2007] 3 EGLR 101 considered.
(3) The claimant had not breached contract and, in so far as it had taken an incorrect view of its obligations under the development agreement as to the minimum price, that was not causative of the termination of the agreement.
(4) In order for a repudiatory breach to terminate a contract, acceptance of that breach should be unequivocal. Mere inactivity or acquiescence was generally not sufficient. The agreement in the instant case had ended in September 2009 by virtue of the exercise of a right of termination and by the claimant’s acceptance of the defendant’s repudiatory breach; the exercise of the right of termination was not an affirmation of the agreement: Dalkia Utilities Services plc v Celtech International Ltd [2006] EWHC 63 (Comm); [2006] 1 Lloyd’s Rep 599 considered.
Jonathan Acton Davis QC (instructed by Field Seymour Parkes, of Reading) appeared for the claimant; Nicholas Dennys QC (instructed by Osborne Clarke, of Bristol) appeared for the defendant.
Eileen O’Grady, barrister