Somewhat to
the surprise of many people in the property world (who have long ceased
believing that judges will reach decisions which accurately reflect the
expectations of the business community!), the courts in the past few years have
ruled that an ‘exclusive negotiation’ or ‘lock-out’ agreement, under which a
vendor promises a prospective purchaser that he will not deal with anyone else,
is capable of forming a legally binding contract.
The
breakthrough on this point came with the decision of the House of Lords in Walford
v Miles [1992] 1 EGLR 207, although the lock-out agreement in the
case itself was held void for uncertainty on the grounds that it did not
specify a time-limit. Some 18 months later, in Pitt v PHH Asset
Management Ltd [1993] 2 EGLR 217, the Court of Appeal was faced by a
lock-out agreement which avoided this problem (it was expressed to last for two
weeks), and their lordships duly ruled that the vendor, who had sold to a rival
purchaser in breach of his undertaking, was guilty of a breach of contract.
So far so
good — but what does this mean in practical terms? The Court of Appeal in Pitt
held that the plaintiff would be entitled to damages, but since the court there
was not asked to assess those damages, the case provides no guidance whatsoever
as to the appropriate measure. No doubt the disappointed purchaser will be
entitled to compensation for his wasted costs in preparing for the purchase,
but it seems likely that what he really wants is something to reflect the fact
that ‘his’ property has been snatched from under his nose by a third party.
If that is
truly what purchasers want, they will take little comfort from the recent case
of Tye v House [1997] 41 EG 160. The plaintiff in that case
claimed that he had informed the defendants (with whom he was negotiating for
the purchase of a golf course) that he would operate only on the basis of
exclusivity, and that they had thereupon promised that, if he came up with an
acceptable offer, they would not negotiate with anyone else for a month. The
plaintiff duly made an offer which the defendants accepted subject to contract;
a few days later, however, they received a higher offer from someone else and
told the plaintiff that they intended to accept it. At this point, the
plaintiff applied for and was granted an interlocutory injunction restraining
the defendants from going ahead with the proposed contract. However, his
victory was short-lived since, in the proceedings now reported, Evans-Lombe J
ruled that the injunction must be discharged.
The judge’s
reason for coming to this decision was a simple one, namely that an injunction
should never be granted where an award of damages would be an adequate and
appropriate remedy for the plaintiff, and that damages would indeed be
sufficient in a case such as this. As his lordship pointed out, the reason why
a court will normally order specific performance of a contract for the sale of
land is that every plot of land is unique, so that damages are not an adequate
substitute. However, a lock-out agreement does not give the purchaser any right
to the land itself, and so the argument for specific enforcement of the
agreement by means of an injunction falls away.
This is bad
enough, but even worse was the judge’s view on damages: ‘Exclusivity agreements
are, as I understand them, designed to protect purchasers from having incurred
substantial costs in getting themselves ready to complete and at the last
minute losing the property because the vendor elects to sell to somebody else.
The purchaser can recover, as damages, his costs thrown away if the vendor
dealt with another during the period of exclusivity.’
Australia in Australia
The case of Banque
Bruxelles Lambert SA v Eagle Star Insurance Co Ltd, which concerned
the extent to which a negligent valuer could be held liable to a lender for
market falls, has embedded itself firmly in the property world’s collective
subconscious. So firmly, indeed, that many people appear to believe that it
reached the House of Lords. Not true, of course; the litigation in which their
lordships declared in favour of valuers and overturned the BBL ruling was in
truth three other cases, namely South Australia Asset Management Corporation
v York Montague Ltd; United Bank of Kuwait plc v Prudential Property
Services Ltd; Nykredit Mortgage Bank plc v Edward Erdman Group
Ltd [1996] 2 EGLR 93. The BBL case itself was one that got no further than
the Court of Appeal, presumably through lack of funds.
Anyone
falling into the error described above will be in good company, courtesy of the
recent decision by an Australian Federal Court of Appeal in Kenny & Good
Pty Ltd v MGICA (1992) Ltd (August 8 1997). The court there, in
giving detailed consideration to the views expressed by Lord Hoffmann in South
Australia, referred throughout to the House of Lords’ case as BBL! More
significantly for Australian valuers, however, the judges unanimously rejected
the Hoffmann approach and decided that, in Australia at least, negligent
valuers in a ‘no transaction’ case may expect to be held liable for all the
lender’s losses, including those resulting from a fall in the market.
In coming to
this conclusion (and thus applying the law as laid down by the English Court of
Appeal in BBL), the Australian court declined to be persuaded by Lord
Hoffmann’s parable of ‘the mountaineer’s knee’. In their view, a doctor who
negligently tells a mountaineer that his knee is up to an expedition would not
be liable if the mountaineer is killed in an avalanche. However, this would not
be on the basis of the new approach put forward by Lord Hoffmann, but simply on
normal principles of causation. And, said the Australian judges, those ‘normal
principles’ would render the valuer for all the lender’s losses in a ‘no
transaction’ case since, had it not been for the negligence, no loss would have
been suffered.
It is our
respectful view that the Australian court, like many people in the UK, has
failed to take on board the true significance of the South Australia ruling.
That case, if properly understood, does not seek to supplant causation as a
test of liability but to augment it. This is an important issue, and one to
which we shall shortly return.
