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 – Claimant seeking summary judgment for breach of contract – Whether schedule of minimum prices condition precedent to commencement of works — Whether agreement frustrated by likely failure to achieve minimum prices — Whether defendant in breach of contract – Whether claimant in breach of contract – Claim dismissed
In August 2007, the claimant entered into an agreement with the defendant, whereby the latter would develop the claimant’s land. The development was to include houses and flats that the defendant would sell on behalf of the claimant, as freeholder, on long leases, for which it would receive a share of the sales revenue generated.
The defendant was required to begin the works within 12 weeks of receiving vacant possession from the claimant and to complete them within 30 months. However, little work was done and the claimant commenced proceedings, seeking summary judgment against the defendant for breach of contract and repudiation of the development agreement, with damages to be assessed.
The defendant argued that its inactivity was justified since it was a condition precedent to the commencement and carrying out of the building work that the properties could achieve the minimum prices set out in a schedule to the development agreement when it came to sell them. It was contended that the global recession meant that the properties would not reach those thresholds and it was not therefore obliged to start the works. Further, the development agreement had been frustrated, following material alterations and could no longer be performed. In any event, the claimant was in breach of contract for failing to re-negotiate the financial elements of the agreement.
The claimant argued that the minimum prices had been inserted into the agreement to protect the defendant in that they guaranteed it a minimum recovery from the development; its refusal to carry out the building works could not therefore be justified. Although the assessment of the damages flowing from the defendant’s alleged wrongful repudiation of the contract would give rise to issues requiring a separate quantum hearing, the defendant had no realistic prospect of defending the claim on liability. Thus, the claimant was entitled to summary judgment pursuant to CPR 24.
Held: The claim was dismissed.
(1) The schedule of minimum prices had been designed to apportion risk and benefit as between the parties and to identify at the outset the anticipated minimum revenue that would be recovered from the development. The claimant would take advantage of rising house prices by reference to a share in the revenue. That brought with it the concomitant risk that house prices might fall, so that its own recovery would be lower. However, it was clear that that risk was inherent in the agreement. The mere risk that the minimum prices might not be realised at some stage in the future could not act as a condition precedent to permit the defendant not to carry out the works in the first place.
(2) The facts and matters that the defendant relied on fell short of satisfying the legal doctrine of frustration. It was clear that both parties foresaw the possibility that the property market would fall and that the minimum prices would not be achieved. The parties had expressly contemplated the potential fall in the value of property in their correspondence. In such circumstances, that fall could not be described as unforeseen. Further, the agreement made express provision for what should happen should the minimum prices have to be reduced. Thus, it was impossible to argue that the contract had been frustrated in circumstances where the allegedly frustrating event had been both foreseen by and dealt with in the contract. Despite the forecast fall in property prices, the agreement remained capable of performance.
There was no reason for the law to intervene and dissolve the contract. Frustration arose only to: (i) give effect to the demands of justice; (ii) achieve a just and reasonable result; and (iii) escape from injustice. However, injustice did not arise in the instant case, because the minimum prices could be renegotiated or, if they could not be agreed, they could be fixed by an expert pursuant to the dispute resolution mechanism. The parties had a clear and obvious shared interest in maximising the revenues from the properties and therefore had an incentive to make the agreement work. The defendant had not suffered an injustice in being obliged to progress the works while renegotiating the minimum prices.
Furthermore, there was no instance of supervening event. It could not be reasonably argued that the receipt of a gloomy forecast two years before the properties came onto the market was an “event” in the proper sense of the word. The happening of an event could not, in principle, give rise to the frustration of the agreement: Krell v Henry [1903] 2 KB 740 considered, Davis Contractors v Fareham Urban District Council [1956] AC 696, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 and McAlpine Humberoak Ltd v McDermott International Inc (No 1) (1992) 58 BLR 1 applied.
(3) The defendant was in breach of contract. Moreover, although the court did not have sufficient evidence to decide whether the claimant had breached the contract by failing to renegotiate the terms of the agreement, it was at least arguable that it was also in breach, and further evidence would be required on that aspect of the case.
(4) Finally, it was arguably open to the defendant to claim that because the claimant was in breach of the agreement by not renegotiating or contemplating renegotiation, the claimant had wrongfully repudiated the agreement. In those circumstances, the defendant’s alleged repudiation ought not to be the subject of a judgment on liability under CPR 24. However, because of the court’s doubts concerning the strength of that remaining defence, it would grant the defendant only conditional leave to defend the repudiation claim brought against it.
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