Sale of property – Breach of contract – Damages – Respondent failing to complete contract for sale of property — Appellants forfeiting deposit paid by respondent — Whether credit being given for deposit to reduce damages for repudiatory breach – Appeal dismissed
In 2003 the appellants bought a house (no 5) from the respondent developer. They claimed that the property was unsaleable owing to its poor construction. The resulting dispute between the parties was compromised as a result of a mediation in which the respondent agreed to repurchase the house for £380,000. On the following day, the appellants entered into a contract with S to buy the house next door (no 4), also for £380,000. Completion of each contract was to take place 28 days after written notice from the seller to the buyer.
The respondent failed to complete and the appellants sought to recover damages for breach of contract. The court concluded that the appellants were entitled to forfeit the deposit paid by the respondent for no 5 and were entitled to receive payment from the respondent as damages for the deposit that they paid to S for no 4, a total of £78,000. However, those deposits had to be offset against other damages in respect of each transaction to which the appellants were entitled.
The appellants challenged that decision, arguing that because a deposit might be retained by a vendor even if it suffered no loss, it was illogical to require the deposit to be brought into account if the vendor had suffered a loss. If the vendor was required to bring it into account, it would be deprived of its unrestricted contractual right to the deposit following the buyer’s failure to complete. In addition, if the deposit had to be brought into account there was no incentive on the buyer to minimise the effect of its breach.
Held: The appeal was dismissed.
The purpose of an award of damages was to compensate the injured party for the wrong it had suffered, by placing that party in the position that it would have been in had the contract been performed. As a general principle, if the injured party had benefited as well as suffered as a result of the breach, it had to give credit for the benefit against the loss suffered. When, in the course of its business, a claimant had taken action arising out of the transaction that had diminished its loss, the diminution of that loss might be taken into account. The court had to balance loss and gain.
It was open to the parties to pre-estimate the loss that they considered a breach of contract would cause, and they could contract for a particular measure of damage to be payable on that breach. If the purpose of such a clause was to compensate the injured party, rather than to deter a breach of contract, the courts would hold the parties to their bargain. Where there was an enforceable liquidated damages clause, the party in whose favour the clause operated would recover only the amount of the liquidated damages. Whether the actual loss was greater than or less than the contractual amount, the party was entitled to the contractual amount.
If a clause that purported to fix an amount payable by a party in breach of contract was primarily deterrent in nature, it would be regarded as a penalty and would not be enforceable; a party injured by the breach would be left to prove its actual loss. A deposit was something of an anomaly. Long custom had excepted a deposit (not exceeding 10% in the case of the sale of land) from the rule against penalties. Thus, the vendor was entitled to forfeit the deposit even if it had suffered no loss. On the other hand, if the deposit exceeded the customary 10%, it would constitute an invalid penalty unless the seller could show special circumstances to justify the larger deposit.
A deposit could also serve as a security deposit to provide the landlord with a fund from which it could recoup compensation for any breach of contract by the tenant. Any surplus would be returned to the tenant at the end of the tenancy. Thus, there was no intrinsic reason why something called a deposit should not be a source of compensation to the injured party. Although it was open to the parties to exclude a particular right or remedy, they had to do so by clear words. In the event of a resale, credit had to be given for the deposit, and there could be no distinction in principle between a case concerning a resale and a case that did not: do so Ockenden v Henly (1858) EB&E 485 considered.
In the instant case, the judge should have required the appellants to give credit for the deposit that the respondent had paid them; he had disallowed their claim for the deposit that they had paid S under their purchase contract but gave judgment for the deposit that the respondent was liable to pay. However, since the amount of the deposit was the same in each case, the substance of the order was that they were, in effect, required to give credit for the deposit paid to them. Mathematically, therefore, the judge’s order was correct.
Furthermore, the appellants were not entitled to contractual interest on the deposit, but there was a valid claim for interest under section 35A of the Senior Courts Act 1981: Aribisala v St James Homes (Grosvenor Dock) Ltd (No 2) [2008] EWHC 456 (Ch); [2008] 2 EGLR 65; [2008] 19 EG 206 considered.
David Berry (of Berry & Walton Ltd, of Kings Lynn) appeared for the appellants; the defendant appeared by its representative, John Walton.
Eileen O’Grady, barrister
